Early last week, the market averages floundered a bit but rapidly swam upstream into the weekend. All the major averages hit new highs during the week with several of them closing at new highs on Friday. I don’t mean to carp, but the market averages have been reeling in new highs for months. Even small-cap stocks, which, as a group had been a fish out of water through the first half of the year, are now in full rally mode.
It seems that the momentum traders and trend followers have bought into the artificial intelligence (AI) growth story hook, line and sinker. The technology sector (XLK), with its gain of a bit more than 2% last week, has spawned about an 8.5% gain over the last five weeks, and is now up more than 22% year to date. In technology’s wake, the traditionally stodgy utilities sector (XLU) has rallied like a rock star this year in anticipation of greatly increased demands for electricity in the AI-powered future. XLU’s 2.4% gain last week nearly matched XLK and pushed its year-to-date gain to over 17%.
A week ago, the healthcare sector (XLV) was still underwater year-to-date. Then, last week, the Trump administration reached an agreement with pharma company Pfizer Inc. The company agreed to reduce the price of some of its drugs in exchange for some tariff relief. The stock spiked higher on the news, and that agreement, along with the fact that it was much less severe than originally feared, chummed the waters for other healthcare company stocks. XLV gained nearly 7% for the week (its best weekly performance since 2022) and is now up a little over 5% year to date.
The energy sector (XLE) was at the bottom of the barrel last week, losing 3.35%. It was no fluke that energy led all U.S. equity sectors with nearly a 4% gain in the previous week although the rally in crude oil that had buoyed energy sector stocks reversed last week. The price for a barrel of West Texas intermediate crude oil gushed to over $65 in the prior week, its highest level in two months. Crude oozed back to about $60.50 by Friday afternoon. That’s its lowest level in four months. Nine component stocks in the sector lost between 4% and 9% last week.
Historically, the stock market has been able to keep its head above water through previous brief government shutdowns. One week into the current kerfuffle, there’s been no red herring from the market. The S&P 500 Index (SPX) and the Dow Jones Industrial Average (DJIA) each gained about 1.1% for the week. SPX is now up a little more than 14% year to date. The NASDAQ Composite Index (COMP), with a little extra help from the technology sector, rose 1.3% and continues to lead all major indices with a year-to-date gain of nearly 18%. The obvious concern is that if the shutdown drags on for several weeks, the market will reach a point where it will need to fish or cut bait.
Perhaps the most encouraging aspect of the recent stage of the rally is that the enthusiasm for stocks has cast a wide net. The Russell 2000 Index of small-cap stocks (RUT) also hit a new high last week. This index that tracks the stock market’s figurative minnows outperformed the big fish averages, climbing 1.86%. The broadening participation has produced enough winners that SPX and DJIA are no longer showing an advance/decline divergence. Their cumulative advance/decline lines have reached new highs, confirming the new price highs. Unfortunately, that’s not yet the case for COMP or RUT.
It sounds like the proverbial fish story: The market is landing record catches and weighing in at all-time highs in spite of the numerous potential storm clouds on the horizon. To wit:
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- An extremely expensive market is now at the very top of its historic valuation range. The market capitalization-to-GDP ratio, which topped out at the late 2021/early 2022 market highs, has now climbed to an even higher peak.
- Stocks are not only absolutely expensive they are also expensive relative to bonds. The equity risk premium, which measures the lure of the additional return that stocks offer against the returns available in Treasury bonds, is at its lowest level in years as stocks continue to rally and bonds fail to rally.
- Excessive speculative activity: Option trading volumes are setting records, fueled in large part by an explosion in the highly speculative trading of “zero days to expiration” contracts.
- Excesses in the bullishness of option trading too: The call/put ratio shows a heavy imbalance toward bullish trades, a reliable bearish contrary indicator.
- Extreme concentration in large-cap stocks: The top 10 largest stocks account for more than 40% of the S&P’s valuation. We recently cited a report that showed such concentration ultimately resulted in even-weight indices outperforming their cap-weighted brethren over the following six and 12 months.
- Negative momentum divergences and advance/decline divergences: Despite COMP hitting numerous new highs recently, its cumulative advance/decline line is still well below its July peak. That’s also the case for the resurgent RUT. Both SPX and COMP are now showing momentum divergences on a short-term and a long-term basis.
- Repercussions from the government shutdown: The ongoing government shutdown opens a whole new can of worms. While the shutdown could be over by the time this article is posted, it could drag on for another week or more. Each additional day of shutdown increases its ultimate impact on our economy and the market.
That’s a lot to tackle. I’m certainly not angling to get in the way of the market. While there are certainly causes for concern, there’s been no reason yet to make a run for a safe harbor. As I wrote last time, “There’s no need to rush for the exits, just be aware of current conditions and be prepared to react if things take a turn for the worse. Talk to your advisor. Have a plan. Given the current shaky technical condition of the market, a little fundamental disappointment could go a long way.”
Last week, SPX traded as high as 6750 before ending the week near 6716. It looks like the index would need to fall by about 2.5% from its current perch, into the 6550 area, before any short-term technical alarms would be triggered. SPX’s 50-day moving average is just below 6500 and climbing; we can expect at least temporary support at that average.
While a few companies will report third-quarter earnings this week, we’re a little over a week away from the traditional beginning of a new earnings season. Wahoo! It’s good to know that, even in the absence of economic updates, we’ll have plenty of market-moving catalysts in the weeks ahead. The number of economic reports, which are subject to the timely resolution of the government shutdown, pales in comparison to the number of U.S. Federal Reserve speaking engagements this week. Almost all of the federal economic data reports are postponed until after the shutdown ends. Even then, analysts expect data releases that were due during the shutdown to be delayed by a week or more. And future releases, beyond the eventual end of the shutdown, are also likely to be delayed.
Economic Calendar (10/6/25 – 10/10/25)
| Previous | Censensus | ||
| Monday 10/6/2025 | No Reports Scheduled | ||
| Tuesday 10/7/2025 | U.S Trade Deficit, August | $78.3B | $60.7B |
| Consumer Credit, August, M/M | $16.0B | $14.0B | |
| Wednesday 10/8/2025 | September Federal Open Market Committee Meeting Minutes | ||
| Thursday 10/9/2025 | Initial Jobless Claims | NA | 227K |
| Continuing Claims | NA | 1,925K | |
| Wholesale Inventories, August, M/M | +0.1% | ||
| Friday 10/10/2025 | Consumer Sentiment, October | 55.1 | 54.0 |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market