By Joseph Adinolfi
The market is behaving like a seesaw, with AI stocks on one side and everything else on the other
The stock market is increasingly looking like a seesaw.
The artificial-intelligence trade is on the ropes. CNN’s “Fear & Greed” index is screaming fear, and the yield on the 10-year Treasury note just clinched its biggest daily drop since the collapse of Silicon Valley Bank.
All the drama was enough to send the S&P 500 SPX down by more than 1% on Thursday, its worst showing since July. Yet at the same time, more than 300 individual S&P 500 stocks finished higher. Investors haven’t seen such a dramatic divergence between the index and its member stocks since January 2025, according to Dow Jones Market Data.
While consumer-staples stocks like General Mills (GIS) and Campbell’s (CPB) surged, their strength wasn’t nearly enough to offset losses in popular AI stocks. The PHLX Semiconductor Index SOX fell by more than 6% on Thursday, bringing the index’s decline from its June peak to more than 26%, according to Dow Jones Market Data. That leaves the SOX – which had doubled in the span of a few months earlier this year as investors plowed money into AI “bottleneck” stocks – squarely in bear-market territory.
It’s just the latest example of how the U.S. equity market has been fracturing into two camps. Trading action in 2026 has started to resemble a seesaw, with AI stocks on one side and everything else on the other, said Mark Hackett, chief market strategist at Nationwide.
“It’s rare that we’ve had this many changes in leadership,” Hackett told MarketWatch on Thursday.
As investors vacillate between favoring one group or the other, the constant back-and-forth is leaving some with a painful case of whiplash, said Dan Farley, chief investment officer for U.S. Bank Asset Management Group.
“It’s a Tilt-A-Whirl, you’re getting whipped around,” Farley said during an interview with MarketWatch, referencing a popular carnival ride.
Record divergence
A four-year bull market largely fueled by optimism surrounding AI’s potential to boost workers’ productivity and corporate profits has left indexes like the S&P 500 and the tech-heavy Nasdaq Composite COMP heavily weighted toward companies expected to benefit from the AI build-out.
The 10 largest stocks in the S&P 500 now account for roughly 40% of the index’s total market capitalization. The more valuable the stock, the bigger its influence on the daily direction of the index, which is weighted by market capitalization.
One result has been that the average S&P 500 stock is growing increasingly divorced from both the performance of these perceived AI beneficiaries.
As of Thursday’s close, the equal-weighted version of the S&P 500 XX:SP500EW was on track to tally a weekly gain, while the SOX, considered the core of the AI trade, was headed for a decline. Barring a sharp shift on Friday, it would be the eighth straight week that the two indexes moved in different directions – the longest such streak on record, according to data going back to the mid-1990s.
That isn’t necessarily a bad thing. Rather than pulling their money from the market, investors are increasingly shuffling money from one pocket to the other, said Farzin Azarm, a managing director of equities trading at Mizuho Americas.
“The rotation is accelerating,” Azarm said. “But investors are really just moving their money around within the market.”
Institutional heavyweights like hedge funds are accelerating the trend. Recent data from Goldman Sachs’ prime brokerage desk reveals that hedge-fund clients have sharply reduced their gross leverage
“The de-grossing has been significant, but that to me is actually a good sign,” Azarm said.
Others took a more downbeat view. The divergence between index performance and stock-market breadth has reached extreme levels in 2026, as BTIG’s Jonathan Krinsky pointed out in commentary shared with MarketWatch on Thursday.
The S&P 500 has moved in the opposite direction from most of its members during more than 30% of all trading days in 2026, by far the most in any calendar year going back to 1996. If the past is any guide, extreme dispersion among the index’s constituents can only continue for so long.
“At some point, we believe the constant rotation stops and we see a higher-correlation selloff,” Krinsky wrote.
-Joseph Adinolfi
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10-22-26 1817ET
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