The U.S. stock market is seeing an extreme, unprecedented divergence. While the S&P 500 keeps hitting fresh highs, gains are concentrated in a shrinking number of stocks, marking the sharpest divergence since 1928 for this time of year.

The second-quarter rally relies almost entirely on mega-cap stocks. Frequently, the index rises even when most constituent stocks fall.

Jason Goepfert, a market researcher and chart analyst at NextGen News, highlighted in an X post chart that the S&P 500 has notched record-high divergences between index performance and market breadth so far this year, based on data dating back to 1928.

The market imbalance is quantitatively striking. As of May 13, Bespoke Investment Group counted 29 days of decoupling between the index and market breadth. The annualized figure of 79 days would hit a record high. Goepfert warned that such extreme divergence warrants technical caution, though it is not a blanket sell signal.

Goldman Sachs quantified the concentration risk. The TMT sector has contributed nearly 85% of the S&P 500’s year-to-date return; excluding TMT, the index gains a mere 3%. Nvidia alone makes up 9% of the index’s market cap but accounts for 20% of its 2026 returns.

The broad market remains weak: the median S&P 500 stock is still 13% below its 52-week high, marking one of the widest 25-year gaps between the index and average stock performance. Mega-cap tech stocks now dominate market movements.

Weakening Market Internals

The "Magnificent Seven" tech giants all rank among the top 20 gainers this quarter. Still, underlying market momentum is fading. In 7 out of the latest 14 record closes, more stocks fell than rose. The percentage of stocks trading above their 200-day moving average is also declining.

Historical Warning Signs

Hedge funds’ momentum leverage stands near a five-year high, with the momentum factor surging 25% in three months. Since 1980, 11 similar momentum spikes all peaked after roughly one month. Historically, such overbought conditions near index highs lead to subpar subsequent returns. Goldman Sachs keeps its year-end S&P 500 target at 7,600, implying merely 1% upside.

Goepfert maintains a neutral-to-cautious stance. He acknowledges the solid fundamentals of tech giants but warns against excessive crowding into these stocks. Currently, strong headline figures disguise a fragile market structure. Instead of a simple buy-or-sell choice, traders need to optimize entry levels and portfolio allocation.