Selective Rally Maintains S&P 500 and NASDAQ Strength — Evening Brief – 07.09.25
At the midpoint of 2025, the S&P 500 and NASDAQ have both clocked fresh record highs, yet the celebratory headlines mask a fragile foundation beneath the indexes’ performance. Year-to-date, both benchmarks are up just 5% — modest gains by historical bull market standards — and technical indicators reveal that only a narrow slice of the market is powering this advance.
While the indexes hover near record territory, breadth metrics remain weak: just half of S&P 500 stocks are trading above their 200-day moving averages, and only 794 U.S. stocks — a scant 13% of those listed on major exchanges — are in a confirmed uptrend based on price momentum, volume, and other technical indicators.
This underscores the selective nature of the current rally, with investor enthusiasm clustered in a handful of sectors: Artificial Intelligence & Machine Learning, Clean Energy & Storage, Healthcare Technology, Cybersecurity, and Advanced Manufacturing & Robotics. By sector performance, Industrials (+8%), Technology (+4%), and Financials (+4%) are leading the pack so far this year.
Heavy concentration in mega-cap names is also striking. The top 10 holdings in both the S&P and NASDAQ heavily overlap, with the so-called Magnificent 7 alone comprising the eight largest stocks in each index by market cap. Perhaps these leaders are priced to perfection given macro tailwinds — from President Trump’s “Big Beautiful Bill” and geopolitical de-escalation in the Middle East to clearer tariff outlooks and the Fed’s expected policy easing later this year.
However, the broader backdrop is less supportive. The U.S. dollar is flashing warning signs, down more than 10% YTD — its worst first-half performance since the 1970s — and the dollar index sits near a three-year low. Net positioning shows institutional investors are now the most underweight the greenback since the pandemic’s onset, reflecting growing unease over ballooning fiscal deficits and the mounting federal debt burden.
At the same time, a notable divergence between the S&P 500 and the Dow Jones Transportation Index (DJT) adds another caution flag. Historically a bellwether for the real economy, the DJT is only now approaching its 200-day moving average. Weakness in the transport sector suggests slowing momentum in goods movement, even as investors chase AI-driven growth stories elsewhere.
Recent macro data backs up this caution. U.S. GDP contracted 0.5% in Q1, unemployment claims are edging higher, and the Atlanta Fed’s GDPNow Forecast has been revised down to 2.9% for Q2 from 4.6% earlier this month. While the market still expects the Fed to hold rates steady at its July meeting, futures now assign a near-98% probability of a rate cut by September, up sharply from just 53% one month ago.
Until the Dow Transports confirm a more bullish signal — alongside decisive tariff resolutions, clear evidence of resilient consumer spending, and a supportive earnings season — the S&P and NASDAQ could remain beholden to a narrow leadership group. For now, staying invested in the sectors driving the indices to record highs may remain the clearest path — but the backdrop shows that cracks are forming beneath the surface.