As of mid-2025, the stock market is flashing several cautionary signals that investors should not ignore. While the broader economy has remained surprisingly resilient in some sectors, emerging cracks in market dynamics suggest the need for increased vigilance and a more defensive investing posture. One of the most significant red flags is the increasing concentration of gains in a small number of mega-cap tech stocks. Indices like the S&P 500 may still show positive momentum, but underneath the surface, breadth is weakening. Fewer stocks are making new highs, and many sectors are underperforming. This divergence can indicate a fragile rally that is vulnerable to sharp corrections if leadership falters.
A healthy bull market is typically characterized by Consumer Discretionary stocks outperforming those in the Consumer Staples sector. The chart below illustrates the ratio of XLY (discretionary) versus XLP (staples). Even though the S&P 500 has just reached new all-time highs, this ratio is lagging badly, indicating that investors are uncertain about the health and confidence of US consumers, most likely due to inflation caused by tariffs and a potential economic slowdown in the second quarter of this year.
We expect the market to start correcting after the 4th of July.
