Wall Street Shines on Tech Giants While Under the Surface Most Stocks Struggle
While major Wall Street indices hover near record highs driven by AI tech giants, beneath the surface over 40% of S&P 500 stocks sit in bear markets amid soaring US treasury yields.
A quick glance at Wall Street might give the impression that everything is fine. The Nasdaq climbed to a new record, the S&P 500 rose by nearly 13% since the beginning of the year, and sits just about 1% away from its peak.
But when you pop the hood, you discover an entirely different market.
According to Citadel Securities, at the end of September, only about 25% of S&P 500 companies traded above their 50-day moving average. In the third quarter, the standard index rose by about 2%, but its equal-weighted version dropped by about 2%, and the Russell 2000 small-cap index lost about 7%. Meanwhile, the seven tech giants rose together by about 11%.
MarketWatch found an even sharper picture. Over 40% of S&P 500 stocks are already trading at least 20% below their 52-week highs. In other words, a large portion of the index is actually in a bear market, while the index itself still looks strong.
The Concentration Effect
The reason is that the S&P 500 does not give every company an identical weight. The larger a company is, its impact on the index is greater.
Microsoft, Nvidia, Apple, and Meta alone added about 300 points to the index in the third quarter, more than twice its total increase.
According to Citadel, Microsoft, Nvidia, Apple, and Meta alone added about 300 points to the index in the third quarter, more than twice its total increase. The rest of the companies combined actually subtracted about 150 points from it. Nvidia alone currently accounts for about 8% of the index.
This creates a situation where a few giant AI-related companies can keep the indices near peaks, while restaurants, real estate companies, small-cap stocks, industry, and interest-rate-sensitive companies suffer.
The Elephant in the Room
The US 10-year Treasury yield is trading around 5.28%, after touching 5.34% this week, the highest level since 2002. In the third quarter alone, it surged by more than 80 basis points.
Why does this matter? Because a yield of more than 5% on government bonds changes the entire calculation. An investor can get a relatively high return without taking stock risk, and a company looking to borrow money must pay a higher interest rate.
The impact is already felt. Global mergers and acquisitions activity plummeted by 41% in the third quarter compared to the previous quarter, partly due to high financing costs.
In commercial real estate, the rate of loans in special servicing due to distress crossed 12%, higher even than the levels recorded during the coronavirus period.
AI Also Feels the Rates
The artificial intelligence boom requires huge amounts of capital to build data centers, purchase chips, and establish power infrastructure.
For example, Meta's Hyperion data center in Louisiana is expected to cost more than 50 billion dollars, with about 27 billion dollars financed through bonds. Meanwhile, Morgan Stanley estimates that about 3 trillion dollars of financing and leasing structures related to tech giants are off their balance sheets.
As long as profits continue to grow, the market can absorb this financing. But at an interest rate of more than 5%, every new project needs to generate a higher return just to justify the debt.
This is precisely the gap defining the current situation on Wall Street. The indices still look strong, but beneath the surface, more and more companies are already behaving as if financial conditions have become much harsher. The question is whether the rest of the market will eventually join the tech giants, or whether the major indices simply haven't caught up to what is already happening to most stocks.
