Dark clouds, but no rain
Daily stock market commentary is replete with warnings of storm clouds forming over global equity markets. But major indices are registering all-time highs with daily, boring monotony, and those dark clouds seem in no imminent danger of producing rain, let alone a storm.
So are the bearish experts wrong?
A healthy, resilient bull market is typically broad-based, with companies across diverse sectors participating in the upward momentum. What we have today is the precise opposite. According to a widely circulated Goldman Sachs report, equity market breadth has plummeted to levels unseen since the dot-com bubble.
Goldman’s analysis also reveals the median S&P 500 stock is about 17 per cent below its all-time high. Additionally, 400 stocks in the index are trading below their 50-day moving average, a key trend indicator. Further, the index remains heavily weighted towards a few large caps – Nvidia, Apple, and Microsoft – making up over 21 per cent of the total, and on the Nasdaq 100, nearly 60 per cent of stocks are in a bear market, having fallen at least 20 per cent from their peaks.
*Please note that this article was written on the 6th of October 2026.
That would suggest equities aren’t insulated from surging bond yields, but because a handful of cash-rich mega-cap tech companies appear immune to borrowing costs, headline index levels mask an underlying storm already underway.
That would suggest a significant section of corporate America anticipates tighter financial conditions, with higher borrowing costs halting capital investment in traditional sectors and resulting in virtually stagnant growth outside of artificial intelligence (AI).
Meanwhile, public debt markets are also showing signs of strain, perhaps more acutely. Credit is usually the canary in the economic coal mine, and recent activity suggests capital is becoming noticeably more expensive and selective.
At the high-risk end of the spectrum, default risk is being repriced rapidly. Spreads over U.S. Treasuries for CCC-rated U.S. corporate bonds – the most fragile tier of junk debt –recently jumped past 1,000 basis points, the highest level since the 2023 regional banking crisis that claimed Silicon Valley Bank (but notably did not cause an equity market crash).
Low-tier borrowers are expected to feel higher costs first, but stress is creeping into high-grade debt as well. For example, the average yield on high-grade U.S. corporate bonds recently topped six per cent, with spreads widening to six-month highs. Meanwhile, mega-issuers are meeting resistance, as shown by Paramount Skydance – the media venture backed by Oracle founder Larry Ellison – which issued US$50 billion in debt, only to watch its bonds sink in the secondary market within hours of release.
Finally, household corporate names like Campbell’s and prominent funds like Bain Capital’s private credit arm faced noticeably sluggish demand, while international high-yield issuers like Brazil’s MBRF Global Foods opted to pull or delay debt offerings entirely.
Much of this friction stems from oversupply. As the tech behemoths, data centre operators, and specialised “neocloud” infrastructure firms swamp the market with debt to finance AI buildouts, capital is ‘crowded out’. Barclays notes that combined investment-grade, high-yield, and equity capital raising in these infrastructure categories has reached US$346 billion year-to-date – a massive jump from US$172 billion the year before.
Consequently, tech-sector Credit Default Swaps (CDS) – which reflect the cost of insuring against corporate defaults – have widened dramatically, with Oracle’s CDS among the worst hit. Strategists like Macquarie’s Viktor Shvets have warned that rising tech CDS levels and creative off-balance-sheet structures – including over US$3 trillion in debt exposure linked to Nvidia’s broader ecosystem – are clear danger signals.
Breaking the storm
By traditional market playbooks, this combination – extreme equity concentration, 60 per cent of tech stocks in a bear market, 1,000 bps junk spreads, and widening CDS levels – should trigger a widespread market correction. Yet, the overall market remains stable.
Why?
Well, unlike the dot-com era, the few companies holding up the index generate unprecedented free cash flow (when they’re not spending it on the race to train and release the most advanced frontier AI models). Their (currently) strong balance sheets may be acting as an umbrella over the broader market index, protecting it from fear-driven selling.
Meanwhile, private credit markets are increasingly absorbing stress in public credit, preventing liquidity shocks from spilling over into the wider financial system.
It’s also evident that instead of a single catastrophic equity market crash, markets are experiencing ‘rolling bear markets’ with sectors taking turns correcting while others hold firm, diluting the impact on headline benchmark indices.
The current mix of ingredients also makes two further scenarios possible.
When benchmarks trade near record highs while most of their underlying components struggle, it creates a classic breadth divergence. That doesn’t guarantee a total collapse, nor does it guarantee a broad-based rally.
One scenario is the headline index eventually gives up its gains and adjusts downward to match the underlying weakness. With the market is relying heavily on a tiny cluster of mega-cap stocks (Nvidia, Apple, Microsoft) to prop up the S&P 500 and Nasdaq 100. If rising bond yields or tightening credit conditions eventually drag down the earnings or valuations of those few market leaders, no supporting stocks are there to take their place.
This closely mirrors the dot-com unwinding (2000–2002) and the late 1972 “Nifty Fifty” top. High concentration masked weakening conditions across the broader market until leadership finally capitulated, causing the entire index to drop significantly.
The other scenario is a ‘Catch-Up’ (The average stock bids up to match the index)
In this scenario, the beaten-down stocks recover, broadening out the rally without requiring the index leaders to crash.
If central bank policy eases, inflation cools, or borrowing costs stabilise, financial pressure on the rest of the market softens. Because 400 of 500 S&P stocks are trading below their 50-day moving averages and nearly 60 per cent of Nasdaq 100 stocks are in bear-market territory, their valuations become attractive to value investors. Capital shifts away from expensive top-heavy mega-caps into neglected sectors, broadening participation and supporting new highs.
We saw similar narrow-breadth setups in 2015 and late 2020, where a rotation into cyclical, small-cap, and value stocks resolved the divergence without dragging down the broad market.
The takeaway for investors
The dark clouds over Wall Street are real and observable in metrics like credit spreads and market breadth. However, a cloud-filled horizon doesn’t guarantee a storm.
Historically, market concentration and poor breadth don’t persist indefinitely. Either the index leaders pull back to meet the broader market, or the laggards catch up.
High borrowing costs are what pressure the average stock. Lower yields would favour a ‘catch-up’ scenario.
If the top three companies maintain strong earnings and cash flow, they can delay a correction. However, any earnings disappointment at the top could trigger a rapid sell off.
Market-cap-weighted indices may currently offer a false sense of security. Active management and stock selection, and equal-weighted index strategies may be more relevant during periods of extreme concentration.
The market is much weaker than the S&P 500 suggests.
*Please note that this article was written on the 6th of October 2026.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
