US stocks sector divergence raises red flags

[Redator]

Equities have enjoyed a remarkable run, with major indices pushing to fresh highs — from last Friday’s Dow peak above the 47,000 milestone to yesterday’s record closes in the S&P 500 and Nasdaq.

Since June–July 2025, following the end of the 12-day Israel–Iran conflict, markets have been ecstatic, printing new all-time highs almost every week.

Yet, beneath the surface, some divergences are starting to show.

The S&P 500 now stands 9.5% above its January 2025 high, the Nasdaq is up 12.5%, but the Dow Jones has gained only 3.6% — a notable gap that hints at sectoral imbalance.

A weekly look at US Indices

Weekly Chart Outlook for US Equities – October 9, 2025 – Source: TradingView

This underperformance of consumer defensives and cyclicals, coupled with persistent USD strength, weighs on broader sentiment.

Tariffs are hurting US manufacturing companies and dragging profit-margin expectations lower.

Things don't look as bad when a sector outperformance drags sentiment higher and pulls indices upward.

On the other hand, a lack of Market Breadth ends up dragging the stability of the overall sentiment lower – This is what is dragging indices lower in today's session.

Market breadth helps to gauge the overall health, direction, and participation within a stock market or index. It achieve this by comparing the number of stocks that are advancing against those that are declining.

US Equity heatmap – October 9, 2025 – Source: TradingView

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How large are the sector divergences ?

YTD performance per Sector (Left) ; Daily performance per Sector (Right)

Top performing sectors this year:

• Basic Materials (dragged higher by commodities): +28.90%
• Communication Services: +24.18%
• Technology: +23.09%

Worst performing sectors this year:

• Consumer Defensive: +1.52%
• Real Estate: +3.71%
• Consumer Cyclical: +4.41%

At some point, Market participants may take caution from some key sectors to the economy underperforming, leading to an overall reduced activity and purchasing power.

Now, a trader's role is to spot if this leads to a simple retracement that prompts dip buying, or if the current highs are established for a longer-run.

For this, the best is to look at the current highs on all indices: If buyers can push for a weekly close above previous highs, it usually means that the trend is to continue.

If they fail to do so, Markets will be looking to retest lower levels in value consolidation.

Safe Trades!

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