The euphoria surrounding the stock market within the financial media seems a bit over the top considering that despite headline gains in the major indexes, most individual stocks are actually down year to date. As of Friday’s close, The Dow is up only 3.8% year to date, and below its all-time high of $45,073 on December 4, 2024. The S&P 500 is higher this year by 8.6%, and the Nasdaq is leading the way, up by 12.4%. To say the rally is top heavy is a gross understatement.
As the Dow, S&P 500 and Nasdaq trade at or near their all-time highs, investors should take into consideration some fundamental developments underway that could mark the beginning of a choppier time for the market over the near term. Fewer stocks are participating in rallies, confirming that the market’s gains are concentrated in a narrow group of mega-tech stocks.
The Advance/Decline lines for each index are showing more distribution than accumulation — especially for the Nasdaq Composite and the Russell 2000, which look troubling. The A/D line tracks the cumulative difference between advancing and declining stocks each day and has diverged downward, indicating weakening market breadth. Unless the Magnificent Seven and a handful of other big-cap tech leaders push higher, the rally will struggle for further sustained upside.
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Stock picking is at a premium with more stocks falling through trapdoors on quarterly estimate misses and cautionary guidance. This is not an attempt to pour cold water on the rally — not at all. It just means that fewer stocks will continue to outperform where investors may have to concentrate their stock exposure.
One area that is of concern for the technology sector is the sudden change in how the AI trade is playing out. AI isn’t just disrupting enterprise SaaS; it is redefining the entire SaaS business model. SaaS revenue is largely based on a per-seat, or per-user basis, but AI tools can automate tasks that previously required human users. Hence, the reduction in headcount users leads to significant revenue contraction.
Microsoft CEO Satya Nadella recently confirmed that around 30% of Microsoft’s code is now written by AI tools, and that figure is trending upward. It reshapes developer roles, turning engineers into orchestrators of AI agents rather than manual coders, which results in a reduction in necessary high-salaried employees. This can be seen in charts like S&P Software & Services ETF SPDR (XSW), which is down 3.85% year to date.
This is a very recent development and a negative “aha moment” for a plethora of software companies that built their fortunes on the SaaS business model. There has been a sudden comprehension of this AI breakthrough condition in the stock market that is having a ripple effect these past two weeks in some of the biggest CRM and software enterprise companies in the sector. Of the top 10 software companies in the world, only five have bullish charts led by Mr. Softie. The other five are breaking down badly.
AI definitely cuts both ways. While rapidly advancing productivity gains, the reshaping of certain businesses means investors cannot be complacent during this massive technological transformation where AI can turn a once thriving business into a dinosaur in a matter of weeks or months.
One other area of concern is the most recent lack of appetite for long-term U.S. government debt. The 30-year Treasury auction held on Aug. 7 did not go well. The higher yield of 4.813% — above pre-auction levels — signals weak demand. The Tail Spread of +2.1 basis points is the widest since August 2024, indicating pricing pressure. The bid-to-cover ratio of 2.26 is the lowest since November 2023. Indirect bidders (foreign buyers) of 59.5% are the second lowest since 2021, and the dealer takedown of 17.46% is the highest since August 2024, meaning primary dealers had to step in heavily. In Japan, primary dealers have taken up to 40% of the total auction issuance.
Fiscal concerns amid soaring deficits and Big Beautiful spending plans are spooking buyers of long-term U.S. debt. The Treasury will likely have to scale back on future 30-year issuances as aversion to longer duration rises. The benchmark 10-year U.S. Treasury pays one of the highest rates for developed nation debt, but U.S. debt-to-GDP now stands at 120.9% as of Q1 2025 versus 81.6% for the European Union.
Source: www.bloomberg.com
As the month of August unfolds, and earnings season culminates with the release of NVIDA’s Q2 numbers on Aug. 27, one can argue there will be fewer catalysts to drive stocks higher in September where more attention will likely be placed on topics such as those within this column.
