Robust Big Tech Stocks Masking Substantial Market Risks

By Victor Sperandeo with the Curmudgeon

Preamble:

10 big name tech stocks currently make up 40% of the S&P 500 market cap. These stocks have even a higher weighting in the Nasdaq 100 (QQQ ETF) at 61.4% to 65.2% and the Nasdaq Composite index at 51% to 53%.

Here’s their weighting in the S&P 500 (note Alphabet/Google trades as two stocks):

• Nvidia Corp (NVDA): ~8.04% • Apple Inc. (AAPL): ~6.93% • Microsoft Corp (MSFT): ~5.47% • Amazon.com Inc. (AMZN): ~3.86% • Alphabet Inc. Class A (GOOGL): ~3.08% • Alphabet Inc. Class C (GOOG): ~2.87% • Meta Platforms, Inc. (META): ~2.64% • Broadcom Inc. (AVGO): ~2.41% • Tesla, Inc. (TSLA): ~2.08% • Micron Technology, Inc. (MU): ~1.73%.

MarketWatch reports, “The 20 top-performing stocks in the S&P 500 — a smattering of hot AI stocks, mostly in the tech and industrials sectors — have contributed $1.7 trillion to the market capitalization of the S&P 500 since Aug. 31, according to a Dow Jones Market Data analysis, while the bottom 480 stocks have shed about $1.9 trillion in value.”

………………………………………………………………………………………………………………………………….

U.S. Economic Update:

Are any of these reports BULLISH for equities?

· Consumer Confidence dropped 6.7 points to 81.9, its lowest level since 2014. The decline was driven by both deteriorating assessments of current conditions and falling future expectations.

· Following adjustments due to methodology changes, the Personal Consumption Expenditures (PCE) Price Index showed inflation was essentially unchanged in August as the overall rate stayed at 3.4% and the Core rate, which excludes the volatile food and energy components, remained at 3.0%. This is still well above the Fed’s 2% target.

· Diesel fuel prices hit record highs: In California, retail diesel prices have reached unprecedented all-time record highs, hovering at a statewide average of $8.44 per gallon. Regular Unleaded Gas is at $6.42 per gallon.

· The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index inched down from 54.6% to 54.5%, but the Prices component shot up from 71.1 to 77.9 as costs rose significantly.

· The BLS Employment Report for September came in weaker than expected as only 29,000 jobs were added and the Unemployment Rate moved up from 4.1% to 4.2%.

· Also, the BLS lowered the job numbers for the two previous months: July 2026: revised down by 31,000, shifting from a previously reported +21,000 gain to a -10,000 decline. August 2026: revised down by 29,000, dropping from the initial 162,000 estimate down to 133,000.

· The steep bond market selloff has been putting upward pressure on mortgage rates, which experienced their largest weekly jump in four years this week, according to Freddie Mac. The weekly survey revealed rates have increased more than a full percentage point over the course of this year. Today’s national average on a 30-year fixed-rate mortgage is 7.47%, according to Bankrate. For a 15-year fixed-rate mortgage, the average rate is 6.77%.

· Here’s a chart of the 30-year mortgage rate from March 1^st (one day after U.S.-Iran war started) to October 1^st (when it was 7.28%):

·

With housing prices up ~50% since 2019, these high mortgage rates make home buying even more unaffordable. Christina Beitler, who runs a mortgage brokerage firm in Austin, Texas, said the recent rise in rates has ground the market to a halt. “We’ve all hit a wall. We’ve pretty much seen a very large stalling of activity. I do think right now that buyers are taking a step back, taking a moment of pause.”

…………………………………………………………………………………………………………………………………………….

Victor’s Market Views and Positions:

Many markets remain hostage to a Federal Reserve that has not yet demonstrated a credible shift from restrictive policy towards preservation of economic growth. Liquidity remains tight, real yields remain punitive, and the U.S. dollar is strong. Also, an unprecedented supply of new U.S. government and AI related corporate debt are choking the fixed income markets.

Investors should assume that risk assets are vulnerable until the Fed changes course—or the economy deteriorates sufficiently to force it to do so.

Fixed income - Bearish:

Bonds remain in a primary downtrend until one of two conditions emerges:

1. The Federal Reserve explicitly changes its policy objective and begins easing financial conditions.

2. Recession or otherwise materially negative economic data forces a reassessment of the higher for longer interest rate path.

Until then, duration risk offers inadequate compensation. The recommended position is 0% in intermediate- or long-duration bonds; 100% in Treasury bills. T-bills provide yield (currently 4.1% to 4.4% for three months to one-year maturities), capital stability, and optionality. In this environment, that is a far better bargain than attempting to catch a bottom in long-term bonds.

Gold and the U.S. Dollar:

Gold appears to be attempting to form a bottom, provided a clear recession does not emerge. If recession risk becomes visible, gold could decline toward the $3,800–$3,500 range before establishing a more durable base.

Current Gold positions:

· Trading allocation: Long 5%–10%, depending on risk tolerance. December Gold sell stop at $4,025.

· Investment allocation: Long 25%–35%, with no stop.

Gold’s failure to rally decisively should not be misunderstood. The immediate problem is not gold’s long-term monetary role; it is the current policy regime. Fed policy remains biased toward higher-for-longer rates, supporting real yields and driving the dollar toward major-cycle highs.

For a longer historical comparison, the Invesco DB US Dollar Index Bullish Fund (UUP) is more useful than the DXY (U.S. $) index futures series, whose contracts roll and complicate long-period price comparisons. UUP’s highest closing price since 2007 was $30.30 on October 3, 2022. It closed at $28.89 on October 2, 2026, just 4.92% below that 19 year ago high.

A dollar this close to a multi-decade peak is not merely a currency story. It is a financial-conditions story: tighter global dollar liquidity, pressure on commodities and foreign borrowers, and an increasingly hostile backdrop for leveraged risk assets.

Equities - Topping action, widening deterioration:

The S&P 500 and Nasdaq-100 appear to be topping, while deterioration is already more advanced in the broader market. The equal-weight S&P 500 ETF (RSP), Russell 2000, mid-cap indexes, Dow Jones Industrials, Dow Jones Transportation, and Dow Jones Utility averages are all in intermediate-term downtrends.

That divergence matters. A narrow group of large-cap winners can sustain headline indexes for a time, but it cannot indefinitely conceal a weakening market foundation.

Dow Theory is approaching a meaningful confirmation point:

· A decisive, high-volume break in the Dow Industrials below 45,166.64 would constitute a bearish signal, approximately 11.75% below Friday’s close.

· The Dow Transports have already moved below their corresponding bear-market confirmation level.

The market also faces an old but still useful monetary-warning framework: Edson Gould’s “Three Steps and a Stumble” rule. The premise is that after three Federal Reserve rate increases, the equity market eventually recognizes that monetary restraint is not temporary and transitions from a bull market into a bear market.

-->While there's only been one Fed Funds rate rise to 3.75%-to-4.00%, the CME Fed Watch tool forecasts an 88% probability of one to three more 25 bps rate hikes by the end of the January 2027 FOMC meeting.

Markets may dismiss Fed policy restraint at first. They eventually do the arithmetic and get the message - look out below!

Suggested strategy: Buy puts. Use liquid equity index options and define risk. The objective is not to forecast the exact high, but to own protection before the crowd realizes that the broad market has already weakened.

Energy - Long petroleum products:

Oil and refined products (like heating oil) remain in a strong uptrend. Suggest being long heating oil—effectively diesel exposure—rather than relying solely on a crude oil long position.

Diesel is the commercial economy’s fuel: freight, agriculture, construction, mining, industrial logistics, and backup generation all depend on it. An 18-wheel tractor-trailer typically travels only about 11–12 miles per gallon of diesel. Across the aggregate U.S. trucking fleet, a release of 100 million barrels is not a strategic solution; it is a temporary headline.

The European Union’s proposed release of 100 million barrels should therefore be viewed in proportion. It may affect sentiment briefly, but it does not alter the underlying supply-demand structure if geopolitical disruption escalates.

[The same principle applies to proposed Treasury buybacks. A $4 billion repurchase program is immaterial against U.S. federal outlays of roughly $20.2 billion per day and an annual deficit near $2 trillion. Such measures may generate favorable headlines, but they do not repair the fiscal trajectory or materially change the Treasury market’s structural supply burden.]

The larger risk is geopolitical. The market appears to be assigning too little probability to a significant expansion of conflict involving Iran after the election. If that occurs, crude oil and refined-product markets are unlikely to remain complacent.

Unpriced Geopolitical Risk:

The central risk is more than just recession, inflation, rates, or one more disappointing BLS payroll report. It is the possibility that several geopolitical fault lines move at once while markets remain priced for an orderly slowdown and eventual Federal Reserve accommodation.

The expert energy analyst known as “Doomberg” has asked: What happens if investors wake up to a simultaneous escalation in Asia and Europe?

· North Korea attacks South Korea.

· Russia attacks the Baltic states, drawing Europe into a broader confrontation.

· China invades Taiwan (and takes over TSMC - the world's #1 semiconductor foundry).

Victor's Conclusions:

Any one of the above geopolitical events would be consequential. More than one would overwhelm conventional portfolio assumptions.

That scenario is not a base case. However, it is far less remote than equity valuations, credit spreads, and volatility pricing suggest. The appropriate response is preparation for a tail risk event(s): preserve liquidity, avoid duration, own defined downside protection, maintain selective exposure to gold and energy, and do not confuse a narrow stock index advance with a healthy equity market.

End Quote:

From “Digital Casino on Cocaine, ” by Chris Irons [You Tube video is here]

“Objective Truth and Market Outcomes are two different things. You can be

fundamentally correct and still lose money. You can have the right thesis and the wrong

timing. You understand valuation perfectly and still get steamrolled by liquidity,

momentum, Central Bank interventions, sentiment, or some exogenous event that

nobody could have predicted, and the market does not care about logic, and it certainly

does not care about your ego.”

Cartoon of the Week:

...........................................................................................................................................

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.

Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).