The S&P 500 hit a new high, but almost only AI trading was rising.

The S&P 500 hit a new high on Tuesday, but the rally was driven by a highly concentrated force: a few tech giants betting on artificial intelligence almost single-handedly supported the market, while other sectors such as healthcare, banking, and consumer goods declined. This continued narrowing of market breadth is raising doubts among investors about the sustainability of this rally.

On Tuesday, the S&P 500 closed at a record high, its first record since August 13. The Nasdaq Composite also closed at a record high for the second consecutive trading day. The combined market capitalization of the "Magnificent Seven" tech giants approached $25 trillion, with Nvidia alone exceeding $5.76 trillion, according to Dow Jones Market Data. Meanwhile, the yield on the 10-year U.S. Treasury note fell slightly by 4 basis points to 5.270%, after a massive sell-off in the bond market pushed yields to near two-decade highs.

However, behind the new index highs lies a divided market picture. According to Dow Jones Market Data, as of Tuesday, less than half of the S&P 500 components closed above their 200-day moving averages, a proportion that has been declining since August. Small-cap stocks, blue-chip stocks, and even the S&P 500-weighted index are all lagging behind major benchmarks, with the Russell 2000 index significantly underperforming the S&P 500 over the past month.

AI narrative reignites, tech giants regain dominance.

After months of consolidation at the beginning of the year, the "Big Seven" tech giants are making a strong comeback. Nvidia rose 4.5% in the past week, hitting a new all-time high; Meta has risen 24% since its previous high on August 13. Shares of AI hyperscale cloud providers, represented by Alphabet, Amazon, Microsoft, and Meta, have rebounded to four-month highs.

The massive energy deal between Alphabet's parent company and Constellation Energy—just a week after Amazon announced a similar deal—further reinforced the market narrative of continued expansion in AI infrastructure capital spending, boosting sentiment in the technology sector. Data centers, optical networks, and other AI ecosystem-related sectors performed particularly well.

Mike Dickson, Head of Research and Quantitative Strategy at Horizon, said:

"The seven tech giants have experienced a strong rally over the past two months and have now actually caught up with the overall gains of the S&P 500, which is to some extent a catch-up rally."

In a high-interest-rate environment, large-cap technology stocks are considered "defensive assets."

The dominance of tech giants stands in stark contrast to the current macroeconomic environment. The Federal Reserve's first interest rate hike in three years in September has led to continuously rising bond yields, putting significant pressure on interest rate-sensitive sectors such as small-cap stocks, utilities, and homebuilders.

Against this backdrop, cash-rich, relatively low-debt tech giants are being repriced as "safe havens" by the market. Keith Lerner, chief investment advisor at Truist Advisory Services, stated:

"Investors are looking around, asking which sectors can withstand all this. Technology stocks are, to some extent, almost seen as defensive assets."

Dan Russo, chief investment officer at Potomac Fund Management, pointed out: "High interest rates and inflation are eroding the value of other stocks in the S&P 500, with only the fortified balance sheets of large-cap stocks supporting the entire market." Although hyperscale cloud vendors are raising tens of billions of dollars to advance their AI initiatives, Russo believes that these companies are still better positioned to maintain growth in a high-interest-rate environment compared to other companies.

The narrowing market reach poses significant risks that cannot be ignored.

Analysts point out that the current market's "extremely narrow breadth" poses a risk in itself. Stock market returns are highly dependent on a small number of stocks, which can fluctuate wildly due to overspending, declining free cash flow, competition from AI models, and other external shocks.

Technically, there are also resistance signals. BTIG strategist Jonathan Krinsky pointed out that although it is generally not advisable to short against the trend when the index breaks through to new highs, cross signals from the breadth, interest rates and credit markets suggest that the sustainability of this "breakout" may not be as good as the market expects.

It's worth noting that while the stocks of hyperscale cloud providers surged, their corporate bond market did not follow suit. The last breakout occurred on August 4th, lasting only two days before the S&P 500 entered a period of sideways trading for two months, until reaching a new high again on Tuesday.

Ross Mayfield, an investment strategist at Baird Private Wealth Management, also frankly stated:

"The market is quite anxious about this narrowing. Ideally, we'd like to see broader participation in the rally. But as long as the largest and most influential stocks in the market continue to drive the market, I think it's ultimately a good thing."

However, Tuesday also saw some signs of broad-based improvement—10 of the 11 sectors in the S&P 500 closed higher for the third consecutive trading day, the first time this has happened since December 2023. Lerner summarized the overall investor sentiment as follows:

"At this moment, all roads lead to technology."

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