Why the S&P 500 Hit a Wall Even With Record Earnings

The S&P 500 dropped 0.2% Tuesday despite sitting near all-time highs, and here's the thing that should make you uncomfortable: for the third straight day, more stocks made new 52-week lows than new 52-week highs. That's not a typo. The index is pushing record territory while the majority of its components are quietly breaking down.

This is what narrow market leadership looks like in real time. A handful of AI-related stocks are carrying the entire index higher while breadth deteriorates underneath. The Philadelphia Semiconductor Index dropped 0.9% after a 60% six-week run, tech stocks led the decline, and the Nasdaq 100 fell 0.9%. When you strip away the handful of mega-cap winners, the structure underneath is fragile.

April's CPI data came in hotter than expected, with core inflation up 0.4% month-over-month and 3.8% year-over-year, the fastest pace since 2023. Oil pushed back above $100 per barrel as tensions between the US and Iran escalated after Trump rejected Iran's latest peace offer. Shipping through the Strait of Hormuz is basically at a standstill. That's the backdrop, and it's adding volatility to a market that was already stretched on valuation.

Thomas Thornton, founder of Hedge Fund Telemetry, pointed out that the ratio of new lows to new highs has been terrible for three consecutive sessions even as the S&P 500 hovers near records. That's a divergence that doesn't resolve itself quietly. When participation narrows this much, you're relying on a shrinking number of stocks to hold the entire structure together, and that makes reversals sharper when they come.

The AI trade has been the primary driver. Corporate earnings are at a four-year high globally, almost entirely because of tech companies, according to Deutsche Bank. Corporate America beat expectations by the widest margin outside the Covid era since at least 2013, per Bloomberg Intelligence. Profits are drowning out the noise right now, but the foundation is thinner than the headline index suggests.

Here's where market structure matters. Wyckoff would call this distribution in a bull market: price pushing higher on declining participation, with selling showing up just under the surface. You can see it in the breadth data. You can see it in how quickly tech sold off Tuesday when inflation data gave the market an excuse to take profits. This isn't a crash setup, but it's not healthy accumulation either.

The Fed has said it'll look through temporary inflation spikes tied to the Iran conflict, and that's the primary reason the market hasn't fallen apart. If inflation stays elevated because oil stays elevated, that calculus changes. The core CPI number (which excludes food and energy) was also stronger than expected at 0.4% month-over-month, and part of that was a statistical quirk related to how rents get measured after the 2025 government shutdown. Strip that out and inflation is still running hotter than the Fed wants.

Jeff Buchbinder at LPL Financial said the CPI "could have been much worse" given Middle East tensions, which is true, but that's not exactly a bullish take. The bar for "good" inflation data has dropped to "well, at least it wasn't catastrophic." The Fed wants to see inflation trending back toward 2%, and we're not there. If oil stays above $100 and geopolitics stay messy, the Fed has less flexibility to cut rates even if economic data softens.

For context on how geopolitical events move markets, we wrote about how the US-Iran conflict is affecting investments a few weeks ago. The short version: oil shocks matter because energy costs ripple through the entire economy, and when inflation expectations shift, rate expectations shift with them.

Most Wall Street strategists are still bullish, and the primary reason is earnings. RBC, HSBC, Barclays, and others have raised their year-end S&P 500 targets in recent weeks. Ed Yardeni put out the highest forecast among major strategists, calling for 8,250 by year-end. JPMorgan's Dubravko Lakos-Bujas told Bloomberg TV that "earnings, the AI narrative has been overriding the whole geopolitical oil situation," and he's right, but he also added that if the Iran situation stays unresolved for another four or five weeks, complacency becomes a problem.

That's the real risk. Markets are pricing in a resolution that may not come. Earnings are strong, but they're concentrated in a handful of sectors, and if those sectors start rotating out while the rest of the market stays weak, the index has nowhere to hide. Tim Urbanowicz at Innovator ETFs said inflation will "take a back seat" to earnings and the AI-driven capex cycle, which is probably true in the short term, but only if inflation actually moderates. If it doesn't, the Fed stays on hold longer, and valuations start looking stretched.

Here's the thing about narrow leadership: it works until it doesn't. When a small number of stocks are responsible for the bulk of the index's gains, you're vulnerable to sharp reversals if those stocks start distributing. The semiconductor index surging 60% in six weeks is the kind of move that usually gets retraced at least partially. Not necessarily because the fundamentals change, but because parabolic moves attract profit-taking, and when everyone's crowded into the same trade, the exits get narrow fast.

The inflation data gives the Fed less room to cut rates, which keeps bond yields elevated, which makes high-valuation growth stocks less attractive on a relative basis. Oil above $100 per barrel means higher input costs for companies, lower consumer spending on discretionary goods, and downward pressure on margins outside the tech sector. And if the Iran situation escalates further, you get a risk-off move that hits equities broadly, not just the laggards.

The market's been ignoring weak breadth for weeks because earnings have been strong enough to justify it, but that's a short-term buffer, not a structural support. When breadth diverges from price this much, you're usually in the late stages of a move, not the early stages. That doesn't mean sell everything tomorrow. It means the probability of a pullback is higher than the probability of a melt-up, and risk management matters more than it did two months ago.

The S&P 500 is near all-time highs with deteriorating participation, hot inflation data, geopolitical uncertainty, and stretched valuations in the handful of stocks holding the index together. That's not a crash setup, but it's not a high-probability long setup either. If you're holding positions that have run hard (tech, semis, AI-related names), this is the kind of environment where taking partial profits makes sense. If you're looking to add exposure, waiting for a pullback to better structure is probably the higher-probability play.

The market's telling you what it's doing if you look past the headline index. More new lows than new highs. Narrow leadership. Declining volume on rallies. These are distribution signals, not accumulation signals. The earnings story is strong enough to keep the index elevated for now, but the margin for error is thin, and the risk-reward is shifting. Trade what you see, not what you hope happens next.