US stock market dangerous divergence intensifies: median S&P 500 constituent down 15% from peak, AI giants prop up index facade.

BlockBeats news, October 17 — As U.S. Treasury yields, the dollar, and oil prices climb, U.S. financial conditions have tightened significantly, and U.S. equities are showing severe divergence: a handful of large-cap tech stocks are propping up index performance, while ordinary stocks remain under persistent pressure. Morgan Stanley Chief U.S. Equity Strategist Mike Wilson warned that tightening financial conditions are producing effects similar to Fed rate hikes, but the impact is concentrated mainly on ordinary stocks.

Data shows that the median S&P 500 constituent has pulled back about 15% from its 52-week high, one of the worst performances since the dot-com bubble burst; the S&P 500 equal-weight index has lagged the market-cap-weighted index by about 6% over the past six months. Meanwhile, the S&P 500 equity risk premium has fallen below zero, meaning equities' valuation appeal relative to U.S. Treasuries has further diminished.

Wilson noted that current pressure stems mainly from valuation compression and has not yet clearly evolved into an economic growth risk. Nominal GDP growth remains strong and corporate earnings continue to grow, but if real interest rates continue to rise, market valuations could come under further pressure. Goldman Sachs warned that U.S. equity supply could increase substantially in 2027 due to lock-up expirations.

Next, whether financial stocks can stabilize and whether U.S. Treasury volatility subsides will become important indicators for judging market direction. U.S. equities currently face two possibilities: ordinary stocks rebound and catch up with large-cap tech, or large-cap tech pulls back, dragging the index toward the weaker performance of the broader market.