The S&P 500 is Soaring, But the S&P 493 is Telling a Different Story

The Two-Tiered Market

The S&P 500 is up over 12% since January 1, 2025. Cue the champagne, right? Well, not so fast. While the headlines trumpet record highs, a closer look reveals a stark divergence within the index itself. It’s a tale of two economies, reflected in the performance of the “Magnificent 7” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) versus the other 493 companies that make up the S&P 500 (which I will call the s&p 493).

Nvidia, for example, has surged over 1,000% in the last two years and is up another 29% this year alone. That kind of performance warps the overall picture. Torsten Slok at Apollo points out that a third of the S&P 500’s market cap is concentrated in those seven corporations – making it, effectively, an AI index. (Seems more accurate than calling it a broad market indicator, doesn’t it?)

So, what’s happening with the other 493? The data paints a less rosy picture. While the big tech giants are riding the AI wave, the s&p 493 is facing headwinds. Sales are slowing, and investment is being pulled back. Small and mid-cap stocks, as represented by the Russell 2000, have fallen 4.5% during the same period the S&P 500 was rallying. That’s not a correction; it’s an outright contraction.

The AI Mirage?

Michael Burry is already voicing concerns about an AI bubble, suggesting the industry is overstating long-term profitability. He’s not alone. Fears of an AI bubble are contributing to market volatility. But even if the AI boom is real, the benefits aren’t being distributed evenly. AI-driven rally splits US market as S&P 493 lags behind giants - CHOSUNBIZ - Chosun Biz

Mark Zandi at Moody’s Analytics notes that AI is a tailwind, but deglobalization and tariffs are headwinds. And those headwinds are hitting smaller companies the hardest. They lack the scale to absorb higher import costs from tariffs or the flexibility to shift supply chains.

Small businesses also rely more on debt for working capital, making them more vulnerable to rising interest rates. The Fed’s rate hikes, while intended to curb inflation, are squeezing Main Street while Wall Street parties on. And this is the part of the report that I find genuinely puzzling: Why are we so willing to accept this kind of disparity?

The current economic growth is heavily reliant on a “wealth effect” – increased spending by high-income earners. But what happens if the tech bubble bursts? A big tech correction could easily spread to the broader U.S. economy by shrinking consumers’ spending capacity. We've seen this movie before.

The tech-heavy Nasdaq has already fallen 7% from last month’s peak. Is this a temporary blip, or the start of something bigger? And if the Magnificent Seven stumble, will they drag the s&p 493 down with them?

A Tale of Two Charts

The divergence between the S&P 500 and the s&p 493 isn't just a statistical anomaly; it's a reflection of a fundamental imbalance in the economy. It’s a warning sign that the rising tide isn't lifting all boats. The question now is whether policymakers will recognize this divergence and take steps to address it, or if they'll continue to focus solely on the headline numbers, ignoring the struggles of the s&p 493.

The Illusion of Prosperity