‘This level of divergence is unprecedented in history’—How long will tech drive the S&P 500 (VOO, SPY)?

The “Trump Bump” might be over. The stock market just had its worst week since Trump’s inauguration, with the S&P 500 dropping 1.7% on Friday and wiping out nearly all its gains since he took office in January.

The S&P wasn’t alone in its dip— the Nasdaq fell 2%, and the Dow lost 1.69%.

Investors had been bullish since Trump’s election victory, betting on lower corporate taxes and deregulation. But Friday’s swoon signals growing investor concerns over stubborn inflation and Trump’s tariffs.

The market decline followed the release of the University of Michigan’s consumer sentiment index, which unexpectedly fell 10% in February to 64.7%, showing that inflation continues to weigh on Americans' minds and spending habits.

With a flurry of executive orders, tariffs, and Elon Musk’s budget-slashing moves under his Department of Government Efficiency (DOGE) initiative, Trump’s first month in office has been unusually active.

This level of activity could drive further short-term market volatility as investors weigh what moves might come next from the White House.

What’s driving S&P 500 returns not seen since the dot-com bubble?

The S&P 500 is coming off another strong year, posting a 23% gain in 2024 after a 24% rally the previous year.

It marked the first time the index logged back-to-back 20% gains since the dot-com boom. And just like in the 1990s, tech stocks were the driving force—only this time, it’s AI giants like Nvidia and Palantir leading the charge.

Despite the S&P’s blistering performance last year, most of its stocks were actually down, highlighting a stark divergence within the index, according to a Barron’s analysis.

This underscores just how much influence a handful of (mostly) tech stocks wield over the index, particularly those in the so-called Magnificent 7. Of course, it’s not surprising that megacaps dominate a market-cap-weighted index like the S&P 500.

The sector divide within the S&P—tech stocks vs. everyone else—is also apparent in its performance relative to less tech-heavy indexes like the Dow.

In a Feb. 16 note, market research firm The Kobeissi Letter pointed out that the S&P and Dow have moved in opposite directions 50 times over the past 200 days, reflecting the dominance of tech stocks in the former compared to the latter.

The divergence is clear: The Dow has lagged the S&P by 17% over the past two years, during which the S&P delivered its 20%-plus gains. “This level of divergence is unprecedented in history,” The Kobeissi Letter noted.

After Friday’s selloff, the S&P rebounded early Monday but ultimately closed down 0.5%. All eyes now are on Nvidia’s Q4 earnings Wednesday, as analysts assess how the company plans to handle rising competition and potential threats from Trump’s tariff policies.

Given Nvidia’s weight in the S&P, as goes the chipmaker’s earnings, so might the rest of the index.