10-6-26: Sector Friction in the S&P 500 Widens

by Ivan Martchev

October 6, 2026

For the month of September, rounding the numbers, the S&P 500 was down 0.4%, which most people would call more or less “flat,” but digging under the surface a different picture emerges. Every sector in the index other than tech was down for the month, in some cases dramatically so, while the tech sector was solidly up, so September lived up to its terrible seasonality, but not for the technology stock sector.

   Source: ChatGPT, Gemini

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If you calculate the return for the S&P 500 Equal Weight Index, the same index but with every stock equally weighted rather than by market cap, that index is down 4.8%, representing a truer market profile.

The reason for this friction is the Treasury market, which saw the 10-year note reach a few ticks below 5.35% last week. As dramatic as the recovery in the bond market was on Thursday, seeing yields drop about 14 basis points from their high, they rose about the same on Friday after the weak jobs report.

To make the comparison easier to understand, this is roughly equivalent to the Dow Industrials rising 1000 points one day and declining 1000 points the next day, using intraday lows. The real drama is playing out in Treasury futures and is spilling over into sectoral collision within the S&P 500 Index.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I have shown this MOVE Index for bonds here before. In the simplest possible terms, it can be described as the “bond VIX.” MOVE and VIX are not calculated the same way, and they measure different markets, but MOVE is a gauge of bond volatility. MOVE and the VIX can diverge dramatically when bonds are more volatile and stocks less so, like now, but it is possible to see 60-70% correlation between MOVE and VIX when stock investors realize the Treasury market will hurt the price of their favorite stocks.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Last week I showed a chart of the S&P 500 Index and a popular junk bond ETF showing great divergence vs. their typical heavy correlation. This week, I am showing the same junk bond ETF with the S&P 500 Equal Weight Index (above) and there is no divergence. Needless to say, if this drama in Treasury futures continues, which is certainly possible, the relative calm masqueraded on the surface of the S&P 500 Index will turn out to be a more dramatic experience, more similar to what the Equal Weight Index is doing.

The latest Equal Weight index decline is like the situation before the Iran war started, which for the S&P 500 was about 10%, at that time, yet this time the S&P 500 is sitting a little over 1% below an all-time high and there is no decline. To say the tech sector is bailing out the S&P 500 is an understatement.

It’s very simple: For the stock market to be out of the woods, the drama in the Treasury market needs to end. Since the relentless climb started more less on the day the Iran war started, one would think if the war ends, or they negotiate in earnest again, the Treasury rout will stop. I don’t think it will be that simple but it would definitely improve the situation dramatically and we may even drop under 5% with a drop in oil prices, which would cause the stock market to explode higher because of very high EPS growth in Q3.

If, however, that third aircraft carrier group that got ordered to depart for Iran last week gets into action and crude oil begins to spike again, it is possible 10-year Treasury yields will be at 5.5% or higher – a game changer for equities, where the tech sector may not have the pull to keep the S&P 500 this calm.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I see a potential silver lining here. It is possible that the recent moving around aircraft carrier groups is just an example of hardball negotiations on behalf of the Trump administration, and if we see some Iranian de-escalation this week – impossible to predict, as I am speculating – or a similar deal we got in mid-May and June, the Treasury market has likely made an intermediate-term top in yields.

We have a climactic high in the 10-year yield with two lower daily highs around it. A veteran futures trader told me this is what all potential intermediate-term high look like, before most traders are sure they are intermediate-term highs. The 10-year yield needs to decline below 5.16% (last week’s and Friday’s low) and stay there for a few days and the move in both in stocks and bonds will be historic, yields dropping and stocks surging. In that case, the stock market won’t wait for the election to start rallying.

Any disorderly trading above 5.35% (on the 10-year Treasury bond yield) increases the possibility of a sharp pullback in equities, perhaps dramatically. Which will it be? I suppose we will know by this Friday.