Behind the 0.5% decline in the Nasdaq: US stocks experience the most extreme divergence in 20 years, and funds are shifting.

The Nasdaq 100 index fell 0.5% intraday to a low, a seemingly small figure, but in the context of the entire US stock market it reveals an important signal: the market is undergoing a structural reshuffle. Meanwhile, the S&P 500 and Dow Jones Industrial Average reached new highs, and behind this “some rise while others fall” phenomenon lies the most extreme valuation divergence in US stocks in 20 years.

Significant Sector Divergence in US Stocks

According to the latest news, US stocks showed a pattern of opening lower and then rising yesterday. The Dow increased by 0.17%, the S&P 500 rose by 0.16%, both hitting record highs, but the Nasdaq 100 failed to keep up with this rally. This divergence is not accidental and reflects a reallocation of market funds.

Big Tech Stocks No Longer Dominate

Earlier, the Nasdaq rose 1.0%, showing strong performance, but recent declines indicate market enthusiasm for big tech stocks is cooling. Walmart surged due to expectations of being included in the Nasdaq 100 index, while large tech giants like Google and Apple, despite outperforming against the trend, can no longer support the entire index as they did in the past. The underlying reason is valuation issues.

Valuation Bubble Reaches Dangerous Levels

According to Goldman Sachs’ analysis, the Nasdaq 100 is currently trading at a forward P/E of 28, while the S&P 500 is at 22, both surpassing the 75th percentile of historical levels. Such valuation levels have only appeared during two periods: the 2000 internet bubble and the 2021 pandemic stimulus period.

Even more concerning is the market’s valuation divergence:

This 5x P/E gap has reached a record high. Over the past 10 years, the earnings growth rate per share for both market cap weighted and equal-weighted S&P 500 has been about 9%, but the P/E ratio of the market cap weighted version has inflated by 40% to 22.4, while the equal-weighted version has only increased by 6% to 17.0. This indicates that market returns are almost entirely driven by a few mega-cap tech stocks, with market breadth extremely narrow.

Funds Are Shifting Toward Small and Mid-Caps

Another sign of market divergence is the change in capital flows. Garrett Jin, suspected “Insider Whale of 1011,” pointed out on the X platform that the Nasdaq 100 underperformed while the Russell 2000 continued to hit new highs. Funds are clearly moving toward mid-cap and small-cap stocks, indicating an increasing risk appetite.

As high-beta risk assets, Bitcoin and Ethereum are considered to be the next recipients of capital inflows. This view reflects market participants’ judgment that risk appetite is expanding.

Potential Risk Signals

Goldman Sachs strategists admit that high valuations are hard to ignore and increase the potential downside of the stock market if earnings fall short of expectations. Although analysts forecast a 15.3% earnings growth for the S&P 500 in 2026, such optimistic expectations are already fully priced in.

Investment firm Oppenheimer pointed out that the valuation imbalance between market cap weighted and equal-weighted indices is “unsustainable,” and expects 2026 to mark a shift toward broader market leadership. This suggests that the dominance of big tech stocks may diminish in the future, giving way to a more diversified market landscape.

Summary

The slight decline in the Nasdaq may seem insignificant, but it reflects deep changes happening in the US stock market: the valuation bubble of big tech stocks has grown large, market funds are shifting toward small and mid-cap stocks, and signals of expanding risk appetite are becoming more evident. This divergence could herald a reshuffling of the US stock landscape in 2026. For investors focused on macro asset allocation, this is a crucial turning point to watch closely.