The S & P 500 as a whole is telling a bullish story taking place on Wall Street this year. Strip out the megacap technology names, and it tells a much different one. Investors have piled into the tech giants — including Nvidia, Microsoft, and Meta Platforms — this year as they mount bets on the proliferation of artificial intelligence. This has propelled the benchmark to all-time highs despite an ongoing tariff threat and questions around U.S. inflation. However, it’s also led to massive market concentration in just a handful of names. The seven-largest names in the index make up about one-third of the benchmark’s total market valuation. There’s another knock-on effect from tech’s dominance: It’s diluting the S & P 500’s capabilities as a leading economic indicator. For years, investors have looked to the benchmark to forecast future economic conditions, and even predict recessions. The Conference Board includes it in its 10 components of its Leading Economic Index. This time around, investors could be better served by looking at the “S & P 495” for clues on how well the economy is doing. “You cannot use the market as an indicator of economic activity if you’re just focused on the five companies involved in the largest market cap companies that are the AI darlings,” said Art Hogan, chief market strategist at B. Riley Wealth. “But if you look at the whole market in say — either the equal weight S & P 500 or the other 495 stocks — I think it’s a pretty clear indication that there’s some concern about the U.S. economy,” Hogan continued. “And I think that’s where it shows up.” Walmart on Thursday reported fiscal second-quarter earnings that missed analyst expectations, with the company saying tariff costs are rising . Target on Wednesday said sales fell once again in the second quarter year over year. The retailer imports about half of the products it sells , making it susceptible to changes in tariff policy. Stock market internals are also not a rosy as the S & P 500’s year-to-date performance suggests. The S & P 500 has rallied more than 8% in 2025. By comparison, the top seven stocks by market cap in the benchmark have surged more than 14% on average and more than 20% on a median basis. The other 493 stocks haven’t fared nearly as well. On average and on a median basis, they’re collectively up more than 5% year to date. Hogan also pointed out that the majority of S & P 500 members remain below their 50-day moving averages, a short term momentum indicator, despite the benchmark trading near record levels. “The internals of the market are more reflective of the view on the economy,” Hogan said. “The top of the market is more reflective of the enthusiasm around artificial intelligence.” A discounting mechanism That increasing divergence could fundamentally change how investors are trained to think of the stock market, given that its ability to work as a discounting mechanism — or its ability to adjust to changing earnings and economic expectations — is so skewed by its largest components. “For most of my career the markets were often the leading indicator … and where cyclicals (cap goods, industrials, consumer, banks) led the economic data would follow,” Goldman Sachs trader Bobby Molavi wrote in a recent note. “Now i wonder if the two can live in total separation.” “To put it another way … is the market now just 5 stocks … 3 themes (ai, banks, defence) … and 1 factor (momentum) and therefor not really a market at all?” the note continued. To be sure, the stock market will continue playing a key role in the economy, and in shaping it. “The stock market is this good anticipating discounting mechanism. But I don’t think they’ve put enough emphasis on the stock market, via the wealth effect and via the firing up of animal spirits also can drive the economy,” said Doug Ramsey, investment chief at The Leuthold Group. “And that aspect of the S & P 500 is probably more important than ever.” Market internals also may be flashing a more positive signal about the economy, at least this week. The Invesco S & P 500 Equal Weight ETF (RSP) is down just 0.1% week to date, while the market cap-weighted version has lost more than 1% in that time. Sectors that have lagged year to date, including health care, energy and real estate, are outperforming this week — while tech languishes. The small-cap Russell 2000 , which is up just 1.6% this year, has outpaced the S & P 500 in August. It’s up 2.5% in that time, while the large-cap benchmark has gained less than 1%. .RUT mountain 2025-08-01 Russell 2000 in August Some of those groups could also get a jolt if macroeconomic conditions can improve, or if there are signs that the Federal Reserve will start easing interest rates — giving relief to more leveraged companies. Yet, given the market’s heavy tilt to megacap tech, any leading economic signal from such a turnaround could be muddled. On top of that, if tech falters, it could wipe out billions of dollars in wealth. “If the stock market had not rebounded as rapidly as it has in the last four months, I think other economic indicators are so weak that we would have slipped into recession,” Ramsey said. “And the market rebound, in essence, kind of inoculated the economy from slipping into recession for a little while longer.” — CNBC’s Fred Imbert contributed to this report.
