(Bloomberg) — The caution flags have been waving for weeks: The record run in US stocks is masking trouble beneath the surface.
Now, signs are emerging that investors have started to heed the warnings.
A Goldman Sachs Group Inc. basket of S&P 500 companies with the strongest balance sheets just posted the best week since early April relative to a basket of firms with weaker finances. The cash-rich companies, including the likes of Fastenal Co., Palantir Technologies Inc. and West Pharmaceutical Services Inc., have gained for three straight weeks, the longest run since Donald Trump’s initial tariff announcement sent markets into a tailspin.
The rotation lets traders who are growing anxious about the market’s three-month surge stay invested while trimming some exposure to more vulnerable companies. Buying shares of firms that have the financial wherewithal to withstand a slowing economy and the threat of margin compression from tariffs could limit downside exposure if the S&P 500’s run begins to falter.
“We’ve been sensing that investors, while riding the rally higher, they’re getting nervous,” said Brian Jacobsen, chief economist at Annex Wealth Management. “A little caution is warranted” in the current market, he said.
The S&P 500 has surged 29% since a low on April 8, closing at a record on Tuesday. Much of the rally owes to artificial intelligence euphoria that’s powered Nvidia Corp. and Microsoft Corp. to multi-trillion dollar valuations. Solid corporate earnings bolstered optimism that Trump’s chaotic trade policies haven’t caused the damage expected. But most of the profit growth was clustered in tech and tech-adjacent sectors, papering over weakness among purveyors of consumer products and makers of industrial equipment.
As a consequence, Citigroup Inc. strategists noted “early” signs of a rebound in value factors from July into early August as investors sought companies whose shares were underpriced relative to financial fundamentals. That has meant losses for profitless tech companies and other speculative plays.
Higher quality, defensive names have “held their own,” said Colin Cieszynski, portfolio manager and chief market strategist at SIA Wealth Management. Telecommunication companies, utilities and insurance firms have performed well, along with the tech behemoths, he said. Other strong defensive performers include tobacco producer Philip Morris International Inc., which is up 40% in 2025.
Strategists and analysts have been warning for weeks that the rally is top heavy — the Magnificent 7 tech stocks account for virtually all of the run since April. Breadth, defined as the number of stocks advancing versus those declining, has deteriorated. An S&P 500 index that strips out market value biases has fallen 10 of the 13 sessions through Monday, while the cap-weighted index has gained on nearly half of those days.
There’s also some worry that the current bull market is past its prime, having lasted longer than previous median ages.
“The bull has been reaching old age with the conditions right for a bear to get started,” Ned Davis Research Chief Global Investment Strategist Tim Hayes wrote in an Aug. 7 note.
Still, investors have continued to pour money into the market, not wanting to miss out. BofA Securities said Tuesday that all major client groups were buyers of US stocks for the second straight week, which also saw the “biggest single stock inflows in two years,” with inflows in both defensive and cyclical sectors.
That relative selectiveness looks prudent in light of the seasonal setup. The S&P 500 has dropped an average of 1.5% in September over the past 25 years — the worst performance of any month.
Still, the hesitancy to ditch stocks is supported by the consensus view among Wall Street strategists. The notoriously bullish cohort has been encouraging traders to buy dips, suggesting a longer term bullish view.
“With many strategists expecting volatility in the months ahead, and yet recommending that dips should be bought, it’s hard to envision a very large pullback absent an actual recession,” said Chris Zaccarelli, chief investment officer for Northlight Asset Management.
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