The US stock market is undergoing a significant structural rebalancing. Technology behemoths and semiconductor stocks have experienced their largest weekly pullback since last year's "Tariff Day," while sectors like small caps, biotech, and airlines have shown surprising strength, making market rotation signals increasingly clear.

Peter Callahan, a leading technology strategist at Goldman Sachs, noted last week that the past week featured some of the most intense market dynamics in recent memory—sharp volatility in momentum factors, a clear expansion in market breadth, and a two-way divergence in the AI narrative, shaking investor conviction in tech leaders. The S&P 500 closed lower for five consecutive sessions, falling below its 50-day moving average; meanwhile, the Russell 2000 index hit a fresh all-time high last Friday.

This divergence has sparked intense debate on a core question: Is the current tech weakness merely a quarter-end disturbance, or the beginning of a more enduring style shift? Callahan and his team have systematically outlined the most noteworthy structural changes in the current market through a series of charts.

Small Caps Lead the Charge, Posting Largest Outperformance in Over Two Decades

Year-to-date, the Russell 2000 index has outperformed the S&P 500 by approximately 1240 basis points. Callahan pointed out that if this trend persists through year-end, it would mark the largest annual outperformance of small caps relative to large caps since 2003.

Concurrently, the performance gap between the Nasdaq 100 index and its equal-weighted version is approaching historical extremes. Data from the past decade shows that the NDX underperforming the NDXE by about 6 percentage points is nearing historical limits, excluding the 2022 interest rate shock—this suggests the concentration premium for mega-cap tech stocks is being repriced by the market.

The expansion of market breadth is evident across multiple sectors. Biotech charts show a breakout pattern over a five-year span, with similar movements seen in housing, travel, REITs, and regional banks. Last Friday, stocks that had lagged over the past 12 months surged over 5% collectively, further reinforcing the rotation signal.

AI and Semiconductors Face a Pullback, but Fundamental Support Remains

The semiconductor sector posted its largest weekly decline since "Tariff Day" last week. Some AI and AI-related names that led gains in Q2—including AKAM, NVTS, QCOM, VRT, IONQ—have quietly given back most or all of their recent outperformance. Callahan characterized this as "in some cases perhaps a healthy reset."

However, he highlighted an important context: the semiconductor sector rallied approximately 95% over April and May this year. The current adjustment is more a digestion after rapid gains than a trend reversal. A chart of NVIDIA relative to the S&P 500 shows the stock remains in a relatively normal rhythm of "advancing and consolidating."

Within the semiconductor equipment sub-sector, the divergence this year is also notable—the year-to-date performance gap between AMAT and ASML has widened to about 80 percentage points. Callahan believes this difference is difficult to attribute to a single factor and may involve varying end-market exposures, positioning structures, and mean reversion effects following the 2025 leadership of LRCX and KLAC.

Elevated Earnings Expectations, Concentration Risk Remains a Concern

Ahead of the upcoming Q2 earnings season, expectations for overall S&P 500 earnings growth have been raised to 22% (year-over-year), the highest pre-earnings expectation level since 2021.

However, data from Goldman Sachs Global Investment Research shows that the median earnings growth expectation for S&P 500 constituents is only 9%, roughly in line with median levels for 2024-2025—this implies the high aggregate growth rate is largely driven by a handful of leading companies.

Specifically, AI infrastructure-related stocks are expected to contribute nearly 60% of the S&P 500's Q2 earnings increment; the top ten contributing stocks combined are projected to account for about 75% of total earnings growth, with NVIDIA and Micron Technology alone expected to contribute over 40%.

Meanwhile, the gap between the market cap share and earnings contribution share of the S&P 500's top ten constituents has narrowed to its lowest level in years. Callahan believes this narrowing "scissors gap" warrants ongoing attention—it could reflect more reasonable valuations for leaders or signal a market reassessment of the concentration premium.

Large Software Stocks Remain Absent, H2 Trajectory Awaits Clarity

Despite the ongoing narrative of broadening market participation, large software and IT services stocks have notably failed to join the recent rally. Year-to-date charts for names like CRM, INTU, ADBE, and ACN show these companies have been conspicuously absent from the recent rotation, contrasting sharply with the strength in biotech, travel, and other sectors.

Looking ahead, Callahan noted the macroeconomic calendar is packed this week—US ISM manufacturing data, JOLTS job openings, the nonfarm payrolls report, and geopolitical developments will provide key pricing drivers for markets. The core question remains unresolved: Is the current market rotation a sustained theme for the second half, or merely a brief pause for the AI engine before another sprint? Investors are closely watching incoming data and earnings for answers.