The S&P 500 hits a new high while the Nasdaq 100 lags behind by 4%! The changing dynamics of capital behind the "ten months of divergence" in the U.S. stock market.

The S&P 500 index emerged from the shadows of the summer sell-off a month ago, returning to a record trajectory and setting multiple historical highs in August. Meanwhile, the Nasdaq 100 index remains about 4% below its historical peak from June 2, becoming the only laggard among the major U.S. stock indices that has failed to reclaim its lost ground. The rift between the two major benchmark indices has lasted a full ten months, reflecting a quiet shift in market leadership and a profound reconfiguration of funding logic. Divergence Context: Ten Months of "Disengagement" The current phase of divergence dates back to October 29 of last year, when the Nasdaq 100 index peaked and then declined, falling into a corrective range. The S&P 500 index returned to historical highs in mid-December, whereas the Nasdaq 100 narrowly missed a new peak at the end of January. The subsequent spring sell-off briefly saw both indices decline in tandem, hit bottom simultaneously, and even rebound together just a day apart, seemingly erasing the divergence. Since the bull market began in 2022, the Nasdaq has gone through multiple corrections. However, the collapse of the semiconductor sector in June became a key turning point for the pronounced disconnection between the two indices. The S&P 500 index performed relatively steadily, while the Nasdaq 100 saw a significant decline. Discussions regarding the divergence may have started around that time, but in reality, this situation has persisted for ten months. Since the current bull market began in December 2022, there have been 173 instances of divergence whereby "one benchmark index is in a correction while the other is not," with nearly half (84 times) occurring in the past ten months. The disengagement between the two indices has lasted for ten months. The summer's correction was the most extreme case of divergence in the sample the Nasdaq 100 hit bottom 33 trading days later than the S&P 500, with a retracement that was more than twice as large. In contrast, during the previous seven corrections that affected both indices, the time gap for hitting bottom was usually only a few trading days. Historical Patterns: The Nasdaq 100's "Lagging" Recovery Model Looking back over forty years of data, this type of divergence is not random but follows a traceable pattern. Since 1985, in instances where both indices fell 10% or more in deep corrections, the Nasdaq 100 has completed its rebound first in 14 out of 16 occurrences, with the dot-com bubble burst and a slight lag in 2016 being the only exceptions. However, in scenarios where the S&P 500 experiences minor declines and the technology sector suffers heavy hits, the pattern completely reverses. In these cases, the recovery of the Nasdaq 100 often lags behind the S&P 500 index, with the most severe lags occurring in 1992, 2005, 2012, and 2024all belonging to digestive periods following periods of prosperity, rather than crisis moments. Technology Stocks: Leading the Rebound during Deep Crises, Lagging in Shallow Corrections The Nasdaq 100 eventually catches up, but it takes two to four months from the time the S&P 500 completes its recovery to when the tech sector rebounds. Currently, the tech sector seems to have fallen into the latter scenario again: its movements have been flat while other sectors advance. Funds have not left the market; they have merely switched tracks. Since the peak on June 2, the S&P 500 index excluding AI components has risen approximately 8%, the equal-weighted S&P 500 index has gained around 5%, while the Nasdaq 100 still has not recovered from its decline. The semiconductor sector, which led the spring rebound, has become the hardest hit in the summer clearing, with software, healthcare, and travel stocks taking its place. Even among tech giants, contrasting trends have emerged: Microsoft contributed about a quarter of the rebound since the July low, while Apple has become the biggest drag on this recovery. The Nasdaq 100 peaked in June, but its engine did not peak simultaneously. The Philadelphia Semiconductor Index continued to rise for the next three weeks, only to collapse nearly 30% during the July sell-off. Amid an index that was near recovery, a bear market brewed, hitting the hottest themes the hardest. Despite the volatile internal sector, the year-to-date gains for the equal-weighted S&P 500 and Nasdaq 100 are approximately 15% and 17%, respectively, nearly a dead heat. The timing of the semiconductor stocks peaking was three weeks later than the Nasdaq 100. Part of the reason lies in the holdings structure. Goldman Sachs' Prime Services division noted that hedge funds made continuous low buy-ins for three weeks before mid-August, followed by the fastest selling in two months. The information technology sector has been the most sold-off sector to date, with deleveraging at its largest scale in over two years. Overall, funds remain cautious, with net leverage in fundamental strategies close to a one-year low, while leveraged funds took a month to unwind their Nasdaq futures short positions, and net asset management long positions have not fully recovered. With both momentum and resistance present, when will the next peak arrive? At the same time, market sentiment is also disturbed by another layer of factors: concerns over AI credit are resurfacing and may be more tangible than in July. A Morgan Stanley report pointed out that hyperscalers' share of U.S. non-financial investment-grade bond issuance has jumped from 2% in 2025 to 19% this year, involving over $3 trillion in off-balance-sheet commitments. Last week, Nvidia delivered impressive earnings, providing strong evidence of the market's substantial demand for AI. However, even the best AI news often struggles to maintain momentum this summer, and rising memory costs are putting downward pressure on profits for some stocks. Furthermore, interest rates are increasingly becoming the core variable in market trading. Federal Reserve Chairman Kevin Warsh warned during the Jackson Hole central bank conference that inflation has not shown a substantive slowdown. He added that policymakers must be convinced that inflation is indeed slowing; otherwise, the Federal Reserve still has work to do. Current market consensus seems to be fracturing: the AI narrative is under challenge but not collapsed. The Nasdaq 100 index has managed to reclaim lost ground after every correction in this cycle, but the foundation for this rebound is narrowthe support from the software sector is limited, while the semiconductor engine remains mired in issues. Trillions of dollars in AI spending have yet to produce clear returns, and funding costs remain unresolved. The market possesses both momentum and resistance, and it remains uncertain which side will prevail. The next peak may not be far off. Since the beginning of this bull market, the Nasdaq 100 has always managed to recover its losses whenever a sell-off stops12 corrections, 12 recoveries, without exception. So far, there is no evidence to indicate that this pattern will be broken. What has genuinely changed is market logic: funds no longer regard the Nasdaq 100 as a mere tool for betting on the AI theme but are now selectively sifting through stocks one by one. The question is, there are very few stocks that can currently drive the index upward.