At the halfway point for 2025, both the S&P 500 and NASDAQ have set record highs. While there is some cause for celebration, both indexes are only up by 5% year to date — pretty unimpressive, save for a few mega-cap tech stocks that are driving the AI bus. The financial media acts as if the 20% correction never happened and it is awesome that stocks have recouped all their losses — but in fact, most haven’t.
Based on how the market closed last Friday, here is their hierarchy of gains (or losses) in the first half:
Year-to-date change (to June 27)
- S&P 500: +5.0%
- NASDAQ: +5.0%
- DJIA: +3.0%
- S&P 400: -0.6%
- Russell 1k: -2.6%
Data source: Yahoo Finance
If we look at all 500 stocks in the S&P 500, 50% are trading below their 200-day moving averages, and fewer than 800 total U.S. stocks are currently in a clear and sustained uptrend, based on technical analysis indicators like price momentum and volume.
This is a small fraction (13%) of the roughly 6,000 common stocks traded on major U.S. exchanges.
This selective nature of the current market strength, with gains concentrated in a limited number of names, reveals that a short list of high-growth sectors are leading the market higher. They include:
- Artificial Intelligence & Machine Learning
- Clean Energy & Storage
- Health Care Technology
- Cybersecurity
- Advanced Manufacturing & Robotics
As of mid-2025, the leading sectors (and some of their sub-sectors) and year-to-date performance are:
- Industrials (+8%): Drivers: Infrastructure spending, defense contracts and reshoring of manufacturing.
- Technology (+4%): Drivers: AI, semiconductors and cloud computing.
- Financials (+4%): Drivers: Rising interest rates, strong balance sheets and institutional inflows.
Looking at the makeup of both the S&P and Nasdaq, there is an extreme overlap among the top 10 holdings of each, with the Magnificent Seven comprising the top eight stocks in each index by cap weighting.
At this point, one could argue that these leaders are fully priced into the market, especially given the possible passage of President Trump’s Big Beautiful Bill, the calming down of hostility and chaos in the Middle East, two expected rate cuts by the Fed coming soon and some clarity on tariff levels applied.
What we can’t know yet is how robust sales and earnings will be with the advent of AI being installed in virtually every industry. There is also an open debate about whether future tariffs will incite inflation.
There is also uncertainty surrounding the weakening dollar under the weight of the growing federal debt. As of last week, the dollar index is taking out its three-year low. The dollar is down more than 10% year to date, its worst first-half performance since the early 1970s. Institutional investors are now the most underweight in the dollar since the COVID-19 pandemic, suggesting a broader shift in sentiment.
Reports that President Donald Trump is thinking about choosing a replacement to Federal Reserve Chair Jerome Powell months ahead of schedule made the dollar’s dramatic drop even worse. Marc Chandler, chief market strategist at Bannockburn Capital Markets, said, “Investors don’t like the direct attempt to influence the Fed.” The idea of appointing a “shadow chair” commenting on Fed decisions and maybe speaking for Trump’s views on interest rates has made currency markets nervous.
Adding further confusion to investor sentiment is the divergence of the Dow Jones Transportation Index (DJT) to that of the S&P 500. The DJT is considered a leading economic indicator and is barely back up to its 200-day moving average, but it did show some healthier relative strength last week.
Historically, this divergence suggests that, while investors are optimistic about tech and AI-driven growth, the real economy, as reflected in goods movement, is showing signs of strain.
Basically, when the transportation index lags, it often sends a cautionary signal about the broader economy and stock market. Recent economic data reveals a more cautious outlook, with a 0.5% drop in first-quarter GDP and rising unemployment claims that implies the potential for softer consumer spending. While there is an 81% probability the Fed will hold rates unchanged at the July 30 Federal Open Market Committee meeting, chances for the quarter-point cut in September have risen to 75.6% from 53.4% a month ago.
The latest Atlanta Fed GDPNow Forecast estimates the economy will post 2.9% growth for the second quarter, down from 4.6% in early June. Much can transpire in the four weeks before the Fed meets, such as the July 9 expiration date for the pausing of tariffs, but calls for a July Fed rate cut are growing by the day.
Until the Dow Transportation Index turn bullish — along with some key trade deals getting done, a start to the Fed rate cuts and a healthy earnings season — the clearest path forward for investors is to stay the course of what got the S&P and NASDAQ to record highs. The fact that they are at new all-time highs after having endured the spring correction is impressive and a testament to American innovation.
