The Market of the Magnificent Few

By the Curmudgeon with Victor Sperandeo

Introduction:

We’re presenting a few statistics with a “chart-o-rama” to highlight U.S. equity market risk, especially negative breath, the cap weighted S&P 500 concentration in a few big tech stocks, and ultra-extreme stock market valuations.

Stock Market Has Bad Breath:

For the week of October 27-31, 2025, the NYSE and NASDAQ had a significant increase in declining issues compared to advancing issues. According to Barron’s:

· For the NYSE, there were 910 advances vs. 1,923 declines with 33 unchanged. The NYSE Composite Index was off by -1.5% from 21,789.63 on October 27^th to 21,459.58 on October 31^st.

· The Nasdaq Composite index gained 2.24% for the week, but declining issues swamped advances on the NASDAQ stock exchange by 3,231 to 1,725 with 79 issues unchanged.

According to Investech Research (subscription required), the Nasdaq Composite recorded its worst breadth on record while hitting a new all-time high on Wednesday. There were more than twice as many stocks declining as those advancing: 1,453 stocks rose and 3,306 fell as declining issues outnumbered advancers by a 2.28-to-1 ratio.

That was only the second time the Nasdaq has hit a new all-time high with declining issues outnumbering advances by more than 2 to 1 in its 54-year history. The only other time this occurred was on November 18, 2021 – one day before the Index peaked. The bear market that followed saw the Nasdaq suffer a decline of -36% over the next 13 months. It took over 2 years for the Composite to hit new highs again.

Source: Investech Research

October 29^th marks the worst breadth on the Nasdaq exchange when the Index hit a new all-time high, a concerning signal that history tells us should not be ignored. Rapidly deteriorating breadth in this tech-heavy index is a key warning that the overall market could be nearing a turning point.

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Technical Tidbits:

· In April 2025 when the S&P 500 fell below 5,000, active managers reduced their equity exposure down to 35%. This week, their equity exposure jumped over 100% (leveraged long) with the S&P 500 at 6,900. Source: Charlie Bilello

· From the Global Market Investor on X: The top 10 US stocks now account for 41.4% of the S&P 500’s market cap. Their combined value has surged above $25.3 TRILLION. 41 AI-related stocks now make up 47% of the S&P 500's value.

· According to the Kobeissi Letter on X, the ratio of the equal-weighted S&P 500 to the S&P 500 index has dropped to 1.11, the lowest since May 2003. It’s now well below the 2008 Financial Crisis low of ~1.18 as per this chart:

· According to Fidelity’s Jurrien Timmer on X, the spread between the S&P 500 cap-weighted P/E and the S&P 500 equal-weighted P/E continues to increase reflecting the domination of a few mega-cap tech stocks (e.g. Magnificent 7). The cap-weighted multiple is now 25.3x, while the equal-weighted P/E is 18.6x.

àThe S&P 500 equal-weighted price index in the top panel chart below shows that not much progress has been made in terms of new all-time highs vs the cap-weighted which has made 36 new highs this year according to Chat GPT which analyzed FRED data.

John Hussman on S&P 500 Valuation:

“I marvel at the rampant level of ‘imagination’ built into actual market prices, and the confidence of investors that elevated profit margins and favorable business conditions will be permanent.”

The S&P 500 stands at the most extreme level of valuations in history. As I detailed in August, our most reliable valuation measures – based on their relationship with actual subsequent S&P 500 total returns across a century of market history – suggest that the expectations of investors for long-term market returns are wildly misaligned with the returns implied by discounted cash flows.

The chart below shows our most reliable gauge of market valuations in data since 1928: the ratio of nonfinancial market capitalization to gross value-added (MarketCap/GVA). Gross value-added is the sum of corporate revenues generated incrementally at each stage of production, so MarketCap/GVA might be reasonably be viewed as an economy-wide, apples-to-apples price/revenue multiple for U.S. nonfinancial corporations.

To be clear – this is not a price chart. It’s a valuation chart. It aligns precisely with the happiest and most satisfying moment of a speculative bubble: the point where wildly misaligned expectations for market returns are being realized anyway – via self-fulfilling speculation. If you understand how a bubble works, this chart is both strikingly beautiful from a mathematical standpoint yet utterly terrifying from an investment perspective.

The Felding Report:

Already, hints of the potential for a large-scale incineration of capital will soon start to appear on Big Tech income statements. “All five of the companies’ earnings are expected to slow significantly next year — partly because the past year has been exceptionally good cyclically, and partly (for all of the companies but Apple) because of heavy AI spending,” reports Robert Armstrong in the FT.

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And if those calling the AI boom a bubble are right, this could be just the beginning of an even bigger bust. Wired reports, “AI may not simply be ‘a bubble,’ or even an enormous bubble. It may be the ultimate bubble. What you might cook up in a lab if your aim was to engineer the Platonic ideal of a tech bubble. One bubble to burst them all.”

Victor’s Conclusions:

The U.S. equity bull market is really an overvaluation of seven stocks. Those stocks have monopoly powers, and their earnings have been what most people call the “market.” When those stocks decline like the “Nifty 50” did in the 1970’s the market as a whole will experience a downside vacuum. The cause will be an unexpected decline in earnings.

End Quote:

“It was still necessary to reassure those who required some tie, however tenuous, to reality. The time had come, as in all periods of speculation, when men sought not to be persuaded by the reality of things, but to find excuses for escaping into the new world of fantasy.”

– John Kenneth Galbraith, The Great Crash, 1929

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Wishing you good health, success and good luck. Till next time……

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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