Tech sector's 44.6% surge in 10 weeks mirrors 1998 risk pattern

The S&P 500 tech sector surged 44.6% in 10 weeks, the strongest run since 1990, with RSI at 82 and the index 28% above its 200-day moving average.

"The combination of extreme overbought readings and stretched valuations has historically preceded significant drawdowns," Jonathan Krinsky, chief technical strategist at BTIG, said. "When fear disappears and only FOMO remains, the risk of a sharp reversal rises materially."

The tech sector now accounts for 39.4% of the S&P 500's market capitalization, above the 35% peak reached during the 2000 Internet bubble, according to LSEG Datastream. The Cboe Volatility Index fell to 13, its lowest level of 2026, as demand for downside protection evaporated. Breadth data tells a more cautious story: about 60% of S&P 500 constituents trade above their 200-day moving averages, below the historical average of roughly 73% typically seen when the index makes new highs, according to LPL Financial's Adam Turnquist. The S&P 500 has outperformed its equal-weight counterpart by the widest margin in a nine-week period since at least 1990.

The structural divergence matters because a re-correlation of individual stock volatility — which could be triggered by positive news such as an Iran ceasefire or broader AI adoption — would likely push the VIX higher, acting as a brake on the equity rally. That dynamic could complicate the market's absorption of three major IPOs planned this summer: SpaceX, Anthropic and OpenAI, targeting a combined valuation of about $3.75 trillion.

Seven of 10 Historical Instances Ended in Drawdown

Krinsky's analysis shows that the current RSI-200-day MA combination has appeared only 10 times since 1990. Seven of those instances were followed by consolidation or declines within 40 trading days. The most recent occurrence was June 2024; prior examples include August 2020 and December 1999 — the latter just months before the dot-com bubble burst.

Using the AI-boom-to-Internet-boom timeline — with ChatGPT's November 2022 launch analogized to Netscape's December 1994 debut — the current juncture corresponds to July 1998. That month marked the start of a more than 20% decline in the S&P 500 tech sector that lasted until October 1998.

Mag7 Lags as Broader Tech Carries the Torch

A narrowing of leadership within the tech rally adds to the caution. Since mid-May, the broader S&P 500 tech sector has gained about 7%, while the so-called Magnificent Seven — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla — have collectively declined 2.3%. The rotation suggests momentum is shifting from the core AI beneficiaries to secondary names, a pattern that historically signals late-cycle behavior.

The rally has persisted despite headwinds that markets are largely ignoring. Brent crude traded near $98 a barrel as the Iran conflict escalated, while the 10-year U.S. Treasury yield rose and the U.S. Dollar Index strengthened. CME Group data shows traders pricing in better than a 75% probability of a Federal Reserve rate increase before year-end. The S&P 500 closed at a record for nine consecutive sessions through Tuesday, breaching 7,600 for the first time, according to The Wall Street Journal.

This article is for informational purposes only and does not constitute investment advice.