The Rally’s Fragile Foundation
After months of near-uninterrupted gains, Wall Street’s love affair with tech stocks may be running out of steam. A new note from JPMorgan Chase & Co. warns that the market’s heavy dependence on a handful of megacap technology names is starting to show cracks, raising concerns that the broader rally could be more fragile than it looks.
“The equity market is showing early signs of vulnerability,” wrote Marko Kolanovic, JPMorgan’s chief global markets strategist. “The combination of stretched valuations, slowing earnings momentum, and rising real yields creates a precarious setup – particularly for technology stocks.”
Tech Titans Under Pressure
The S&P 500’s 2025 rally has been overwhelmingly driven by a small group of companies – notably Nvidia, Apple, Microsoft, Meta, and Amazon. Together, those five now account for more than 30% of the index’s total market capitalization.
But in recent weeks, the air has begun to leak from the bubble. Nvidia shares, once unstoppable, have fallen more than 15% from their all-time highs, while Apple’s latest earnings disappointed amid softening demand for devices.
“Leadership concentration is unsustainable,” Kolanovic noted. “When one sector drives the entire market, even small cracks can create outsized tremors.”
JPMorgan’s models now indicate a rising probability of “equity mean reversion” – a process where extreme sector outperformance corrects through relative underperformance, often triggered by macro catalysts like interest rate shocks or earnings downgrades.
Macro Headwinds Reemerge
The backdrop for risk assets has also shifted. Bond yields have risen to their highest levels in months as investors temper expectations for Federal Reserve rate cuts, while inflation data continues to surprise on the upside.
“The market’s assumption that monetary policy will remain permanently accommodative is misplaced,” Kolanovic warned. “If inflation proves sticky and rates stay higher for longer, growth and tech sectors will be the most exposed.”
JPMorgan estimates that every 25-basis-point increase in the 10-year Treasury yield could shave 3%–5% off the fair value of high-duration growth stocks, a category that includes most of the market’s tech leaders.
Earnings Momentum Fading
The bank’s research also points to slowing revenue growth among the largest tech names. After posting double-digit gains throughout 2023 and early 2024, aggregate top-line growth among the “Magnificent Seven” has cooled to 6.8% this quarter, the lowest since the pandemic recovery.
Meta and Alphabet both flagged softer digital ad spending, while Amazon signaled caution in its cloud division. Even Nvidia, the undisputed star of the AI boom, reported slowing sequential growth as competition intensifies.
“The problem isn’t collapse, it’s deceleration,” said Andrew Tyler, JPMorgan’s head of U.S. market intelligence. “Investors are paying premium multiples for companies whose growth curves are flattening.”
Breadth Weakens Beneath the Surface
Market internals also paint a concerning picture. While the Nasdaq Composite remains near record highs, fewer than 40% of its constituents are trading above their 50-day moving averages, a sign that gains are being driven by fewer and fewer names.
“It’s like watching a table balanced on one leg,” said Tyler. “If megacaps wobble, everything else loses balance.”
Defensive sectors such as utilities, healthcare, and consumer staples have quietly outperformed in recent weeks, suggesting that investors are rotating into safety even as headline indexes remain buoyant.
The AI Trade Isn’t Over – But It’s Maturing
Despite the warnings, JPMorgan is not calling for a tech crash. Instead, the bank’s strategists describe the current environment as a transition from euphoria to normalization.
“AI remains a generational investment theme,” Kolanovic wrote, “but the easy money phase is ending. Going forward, fundamentals – not hype – will determine winners.”
The firm expects continued capital flows into semiconductors, cloud infrastructure, and data center power systems, but warns that speculative AI-adjacent stocks could see steep corrections.
Investors Growing More Defensive
Recent fund flow data supports JPMorgan’s thesis. According to EPFR Global, U.S. equity funds saw $12 billion in outflows last week, the largest since early 2023, while short-term Treasury and money market funds saw inflows of over $20 billion.
“The risk appetite is thinning,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “When investors start rotating out of momentum names and into cash equivalents, it usually signals fatigue, not panic, but caution.”
The Market’s Tipping Point
For now, the outlook depends largely on the Fed. If policymakers cut rates this winter, risk assets could find new life. But if inflation holds and bond yields rise, the fragile balance between valuation and earnings could crack.
“The market is still priced for perfection,” Kolanovic concluded. “But perfection is rarely sustainable, especially when it’s built on five stocks.”
