Rising yields and struggling consumers are catching up to a stock market that's increasingly dependent on AI
The stock-market rally is increasingly dependent on artificial-intelligence names.
On the surface, the U.S. stock market looks stable. The S&P 500 was trading only marginally below its record highs on Friday, as stocks brushed off early weakness to mount a late-day comeback. The Cboe Volatility Index VIX, known as the VIX or Wall Street's "fear gauge," finished the week at 15, a level well below its long-term average. That signaled to investors that the waters were calm.
But look a little harder, and things appear less serene. Rising Treasury yields have put pressure on yield-sensitive investments like utilities, real-estate investment trusts and home-builder stocks, while the market has fallen back on a familiar life raft: tech stocks.
As a result, a surprising number of individual stocks are struggling, even as the biggest names with the most influence at the index level have continued to perform.
The number of stocks listed on the New York Stock Exchange that were trading at a their lowest level in at least a year recently hit the highest level since April 2025, data from Fairlead Strategies showed. That's when the unveiling of President Donald Trump's unexpectedly aggressive tariff agenda left global markets unsettled.
Furthermore, data shared with MarketWatch showed that since the middle of August, when breadth started to thin out, semiconductor stocks, tech hardware names, software and a handful of other subgroups within tech have driven nearly all of the gains for the S&P 500 SPX.
Indeed, the relative performance between an exchange-traded fund that tracks an equal-weighted basket of the megacap tech stocks known as the Magnificent Seven; an ETF that tracks the S&P 500; and one that tracks an equal-weighted version of the broad index illustrates how a handful of highflying stocks have performed recently relative to the broader market.
Ultimately, narrow breadth may not matter all that much to investors in diversified index funds. The tech-led rally has propelled both the S&P 500 and the Nasdaq composite COMP to just shy of record territory. Even the Dow Jones Industrial Average managed to avoid a fourth straight week in the red on Friday.
Much of that strength can be attributed to the resurgence of the Magnificent Seven. The Roundhill Magnificent Seven ETF MAGS, which tracks shares of Google parent Alphabet (GOOGL) (GOOG), Amazon.com (AMZN) , Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA), has been on a strong run compared with the S&P 500, data showed.
"I think the risk appetite still seems to be there," said Katie Stockton, founder and managing partner of Fairlead Strategies. Financial-services stocks may be struggling, but shares of Meta are on track to finish September with a gain of more than 30%, after the release of the company's Muse artificial-intelligence agent sparked a monster rally in the stock.
"That's not the stuff of a weakening tape," Stockton said.
But scratch that surface and the picture looks a lot less healthy. Since the July 28 low for the S&P 500, the percentage of the index's constituents trading above their 200-day moving average has declined to 51% from 73%, a notable deterioration in participation during a period when the index itself has been flirting with new highs.
This dynamic does not necessarily signal that stocks are set for an imminent reversal to the downside or that investors are abandoning equities, said Adam Turnquist, chief cross-asset strategist at LPL Financial. Narrow breadth has been a common feature of the most recent bull market.
But it does suggest that the market's structural support has become "increasingly narrow and more susceptible to weakness in its leadership groups," he said.
So far, tech stocks have proved they can stomach rising Treasury yields, Stockton said. That could signal that the market could be due for more upside from here, as much of the broader market has entered oversold territory.
That isn't surprising. For years, technology stocks have been riding a wave of AI-inspired momentum powerful enough to override macroeconomic concerns, entirely due to those companies' strong earnings growth and favorable profit outlooks. However, stocks in cyclicals and interest-rate-sensitive sectors have largely missed out on the benefits.
Without a compelling earnings story, they are left exposed to the squeezed consumer and an economy increasingly dependent on AI-related spending and investment.
But that shield won't last forever. Rising bond yields reduce the present value of future earnings and make safer assets such as Treasurys and gold more attractive for investors. Furthermore, hyperscalers are also spending heavily on data centers and chips, so higher interest rates would raise the cost of financing that investment. If the AI investment boom begins to weaken, it could be a problem for the broader market.
At the same time, a wave of massive corporate-bond issuance to fund the AI infrastructure build-out could also add to the broader supply of bonds, potentially driving yields even higher.
The bond market's relentless selloff intensified last week, even after the Treasury Department ran its second buyback operation this month to support market liquidity. The yields on 10-year and 30-year Treasurys touched their highest levels in decades. Bond prices and yields move in opposite directions.
"Now AI debt is needed to bring all this to life in increasing increments, and that's where the cost of that debt continues to get higher," said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company.
"I don't think tech stocks will be interest-rate-insensitive for any longer, and I don't think AI companies can hold up the economy like they have in the past few years when rates have gone up," he told MarketWatch in a phone interview last week. "This is where I think that the risk profile of that AI trade has changed."
Ken Jimenez contributed.
-Isabel Wang -Joseph Adinolfi
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