Record divergence in US stock market shows what happens when it’s AI vs the economy

The 1.6% advance for the S&P 500 – the benchmark US stock index – disguises an uncomfortable truth: this week was a bad one for most stocks in the market.

The Invesco S&P 500 equal weight ETF (RSP), which treats Apple like it’s just as important as International Paper Co., fell 0.5% this week while the S&P 500 market cap weighted ETF (SPY) posted a solid gain.

This kind of divergence –— equal weight down at least 0.5% and market cap up 1.5% or more — has never happened in the history of these products, going back to Q2 2003. The 2 percentage point plus gap between the two is also in the 99th percentile over their more than 20-year history.

There were dribs and drabs of less-than-stellar economic news this week that weighed on cyclical parts of the market. Consumer sentiment unexpectedly fell. A surprise jump in US initial jobless claims. A significant build in oil inventories.

And of course, French political turmoil played a part. Since European economies are generally more levered to manufacturing, concerns about there tend to have a bigger negative impact US industrials compared to internet platform companies.

Meanwhile, the market cap index is overweight areas of the economy that (right now!) aren’t being driven by the perceived ebbs and flows of the business cycle. Think Broadcom’s blowout quarter on robust chip demand, or investors deciding they were on board with Apple’s AI strategy after all.

The good news: there’s much more money invested in market cap indexes than their equal-weight counterparts. And your gains still count, even when breadth is terrible.