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Introduction

The narrowness in the stock market rally continues to worsen, yet the indexes remain largely unfazed. We have repeatedly discussed this as a warning sign for the broader market, but the cap-weighted nature of the indexes continues to provide fuel for the major averages to grind higher.

This is a structural dynamic that increasingly feeds on itself, as professional managers are forced to sell underperforming stocks and rotate capital into the names that continue to work. We have stressed the need to remain selective for months, as this pattern became evident very early in the rally. Unfortunately, the bifurcation underneath the surface has only become more pronounced.

Consider this: on a day where the Nasdaq rallied more than 1%, the percentage of SPX stocks trading above their 200-day moving average actually declined and now sits below 55%. The 50% threshold is an important level to monitor closely. Stay tuned.

The culprit: inflation and triple-digit oil. While the sheer weight of the AI infrastructure trade continues to hold up large parts of the economy, much of the rest is languishing — something we discussed extensively in last week’s report.

The pundits like to talk about a K-shaped economy. Well, this is a K-shaped rally. The bifurcation in sector performance has become increasingly notable. Since the market bottomed on March 30th, Technology and Communication Services have overwhelmingly driven the alpha bus.

If you are not overweight the right sectors, you likely just missed your bus stop. And trying to catch a bus barreling down the freeway at 90 MPH is no easy feat.

Unfortunately, the inflation impulse is still being driven largely by stubbornly elevated oil prices. And until the SOH situation improves and gives investors a reason to look beyond the next quarter or two, the current market dynamic likely persists. Maybe investors continue looking past the macro degradation, or maybe they don’t. The question is: for how much longer?

It’s easy to glance at the indexes and assume all is well, but that masks the reality that much of the market continues to struggle underneath the surface. Today’s PPI report was another stark reminder that companies not directly participating in the AI spending boom are having a difficult time keeping pace with rising input costs.

Wholesale inflation just printed its highest reading since 2022, with PPI rising 6% year-over-year. Core PPI, excluding Food and Energy, increased 5.2% versus April 2025.

Service costs climbed 1.2%, the largest increase in four years. Prices for transportation and warehousing services — a category many forecasters had already flagged as especially sensitive to the conflict — surged 5%, driven primarily by trucking costs and higher margins at fuel retailers.

The report also showed that truck transportation freight costs jumped 8.1%, the largest increase in data going back to 2009.

The question now becomes: how long will producers continue absorbing these higher costs before passing them along to an already struggling Main Street consumer? That remains the sticking point for any meaningful SOH resolution. The longer this drags on, the less willing management teams will be to absorb the margin hit themselves. After all, lagging stock prices do not help during year-end compensation discussions.

Time is ticking, and perhaps the upcoming meeting with President Xi will help unearth a path toward resolving the SOH closure. We shall see.

Let’s check the charts.