There’s something odd about the stock market’s concentration: Morning Brief

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The major indexes may have only chalked small gains Wednesday, but while the generals were sleeping, the soldiers were on the march.

At the vanguard, moderate losses in large-cap energy and financials were offset by outsized gains in the consumer discretionary sector — thanks principally to Amazon (AMZN) and Tesla (TSLA).

This seesaw theme has become a subtle but important market narrative. On days when AI isn’t leading the charge, select pockets of strength keep the S&P 500 from more pronounced sell-offs — which itself is holding index volatility near multiyear lows.

The recent “plunge” in Nvidia is instructive.

Only Monday, the AI poster child closed down 13% from its record high. Surveying social media, you would think Wall Street was burning.

But during that harrowing three-day slump, a funny thing happened: The Dow Jones Industrial Average (^DJI) — up only 3% this year versus 14% for the S&P 500 — staged a comeback. Energy perked up, and biotech jumped as forgotten pockets of the market showed signs of life.

This seesaw-offsetting behavior is everywhere right now in lieu of correlations between even stocks in similar sectors. Stocks simply do not want to move in the same direction.

“This is a generationally weird US stock market,” wrote Luke Kawa, a former director of investment solutions at UBS Asset Management Americas now at Sherwood Media.

Kawa was specifically referencing Tuesday’s price action, in which the S&P 500 managed a 0.4% gain despite 384 of its components closing in the red — a new feat for a data set that goes back to 1996.

Similar “firsts” have been dotting the market statistics recently.

But none of this detracts from the argument — supported by ample research and history — that it’s perfectly normal in a bull market to have gains concentrated in a few stocks.

Winning stocks that enjoy a secular-themed rally get bigger and bigger until the move runs its course.

In a bull market, when leading stocks falter, other parts of the market that may not be generating hype-filled headlines can rise to the occasion. Sector rotation keeps volatility at the index level low as new winners offset losers. And then, at some point, the music stops and all sectors start selling off in unison, kicking off a new bear market.

Kawa tied this to the current market, writing that “different major groups within the US stock market have been marching to the beat of their own drummers recently, and this dynamic has helped keep the stock market from lurching violently to the downside.”

We’re not only currently seeing disparate returns among sectors and industries, but also inside them — even in the megacap tech stocks. In the past six months, if some of them, say Microsoft and Alphabet, are up, Nvidia and Apple might be down. The correlation between directional moves between pairs in this cohort is a scant 43%, Kawa noted.

All of this zigging and zagging keeps index-level volatility at bay, but Kawa lays out the major risk in this environment: a “correlated shock” that is distributed “among these companies that control so much of US as well as global equity indices.”

Though the “big drop” remains the focal risk, divergences can persist longer than arbitrage investors can remain solvent (to turn an old Wall Street trope).

In fact, research by the data analytics team at BofA suggests that the current regime of low inter- and intra-sector correlation can persist for years.