Risks Lurk Behind the S&P 500's Record High! Most Constituent Stocks Show Weak Performance as High Oil Prices and Rising U.S. Treasury Yields Deepen Market Divergence

Title context: Risks Lurk Behind the S&P 500's Record High! Most Constituent Stocks Show Weak Performance as High Oil Prices and Rising U.S. Treasury Yields Deepen Market Divergence Text: Supported by the artificial intelligence (AI) boom, the S&P 500 and Nasdaq 100 remain resilient, but signs of weakness in global financial markets are steadily spreading. Persistently elevated oil prices and borrowing costs are hitting bond, credit, and small- and mid-cap equity markets, while the strength of large technology stocks masks growing divergence within U.S. equities. This week, the U.S. 10-year Treasury yield briefly approached 5.4%, the highest level since 2002, while Brent crude oil prices held above $100 per barrel, fueling concerns that an inflation shock could persist for an extended period. Global financing costs have also risen broadly, with U.K. government borrowing costs climbing to their highest level in 19 years, and the French government bond market also coming under pressure. Despite turbulence in the bond market, major U.S. stock indexes have shown considerable resilience. The S&P 500 hit a record high on Tuesday, then pulled back over the following two trading days on concerns about the outlook for AI demand, before rebounding on Friday amid investor optimism about a new round of corporate earnings, and it is still hovering near record highs. The U.S. economy's continued growth has allowed investors to temporarily ignore the risks posed by rising Treasury yields and geopolitical turmoil. However, looking at market internals, the strength of the major indexes is not supported by most individual stocks. Data show that only about one-third of S&P 500 constituents are currently trading above their 50-day moving averages. This indicator is typically used to gauge the short-term breadth of a market rally, and a low ratio means the index's gains rely mainly on a handful of heavyweight stocks rather than broad-based market strength. For the Russell 2000, which is more sensitive to changes in interest rates, the situation is even more severe. Only 27% of small-cap stocks in the index are trading above their 50-day moving averages, reflecting the clear pressure that high financing costs are placing on smaller companies with greater funding needs. It is worth noting that when the S&P 500 set a record high this week, market breadth had already fallen to an extremely low level. At that time, only 30% of constituents were above their 50-day moving averages, the lowest share on any record-high day for the S&P 500 since Bloomberg began tracking the data in 1990. James St. Aubin, chief investment officer at Ocean Park Asset Management, said the market-cap-weighted S&P 500 is masking the substantial damage already occurring beneath the surface. He noted that even if the Federal Reserve takes no further action, the bond market itself is tightening financial conditions by pushing up financing costs. The real risk is that a shock initially triggered by rising energy prices could ultimately turn into a corporate earnings problem, a possibility the stock market has not yet fully reflected. The high-rate shock is spreading from the bond market to other assets. In the credit market, borrowers with the weakest credit quality now face financing yields of about 15%, a heavy burden for companies that need to refinance debt. Recently, credit spreads on U.S. high-yield corporate bonds have continued to widen, and the price of a junk bond ETF has fallen to near the lows seen during the market selloff triggered by last spring's tariff war. Corporate listing and financing activity has also been affected. Recently, several high-profile companies postponed their listing plans, a phenomenon Lynn Martin, president of the New York Stock Exchange Group, attributed to rising interest rates. However, the current rate shock has not yet prompted a full-scale investor retreat from risk assets, manifesting more as portfolio rebalancing. Investors are gradually reducing allocations to assets sensitive to bond yield volatility and high financing costs, including speculative-grade credit and foreign-exchange carry trades. Divergence within the stock market is also becoming more pronounced. The Russell 2000 has fallen for a fifth consecutive week, down about 8.5% from its previous high and gradually approaching the technical correction range typically defined as a 10% decline. The real estate sector also remains under pressure. By contrast, the S&P 500 and the tech-heavy Nasdaq 100 both posted gains this week, further highlighting the performance gap between large technology stocks and other sectors. Still, Thursday's selloff in chip stocks showed that even the AI investment theme that had been driving U.S. equities higher is not entirely immune to shifts in market confidence. Strategists Manish Kabra, Charles de Boissezon, and Kawtar Mamouni at French bank Industrial Bank laid out two sharply different market scenarios in a recent report. In the bearish scenario, if large technology companies' cash flows remain under pressure while the U.S. 10-year Treasury yield rises to 6% and oil prices climb to $150 per barrel, the S&P 500 could fall more than 20% next year. Conversely, if Treasury yields fall back to around 4%, oil prices drop to $80 per barrel, and the fundamentals of large technology companies improve, U.S. equities still have room for further gains. Kabra said a 5% Treasury yield is already enough to pressure equity valuations, and once yields rise to 6%, a credit event could emerge in the market. He believes the risk could first appear on highly leveraged non-private-sector balance sheets. At present, the core issue drawing market attention has shifted to fiscal stability and sovereign debt sustainability across countries. Aubin of Ocean Park said the firm's internal models have identified downtrends in multiple investment areas sensitive to high rates, so the team is reducing exposure to credit-sensitive assets, including high-yield bonds. He called credit spreads on sub-investment-grade bonds the "true barometer" of market fear, and noted that the continued widening of credit spreads since mid-September is especially worth watching. Some investors have already begun actively retreating from previously strong AI-related assets. Investment manager Jeff Muhlenkamp, who manages a fund of about $270 million, has outperformed the S&P 500 year to date, but he recently increased his energy stock holdings while selling off nearly all of his AI-related investments. Speaking about the AI investment boom, Muhlenkamp said he would rather exit early while the market frenzy is still ongoing. He warned that companies can still obtain financing support at present, but once financing channels dry up, the market situation could reverse quickly.