A yawning gap has opened up inside the stock market that to some looks like an abyss. We see an opportunity.

On the surface, the stock market is doing just fine. The S&P 500 index ended September with a loss of just 0.5%, and is less than 1% below the record high it set in August. That's certainly better than might be expected, given that the Federal Reserve has started raising interest rates, the 10-year Treasury yield just hit its highest level since 2002, and the Iran war continues with no end in sight, giving a boost to energy prices. Meanwhile, there are still lingering questions about the artificial-intelligence trade, from the fundamental-how will Anthropic and OpenAI turn a profit?-to the existential-will artificial intelligence mean the end of humankind?

A glimpse beneath the surface reveals that these concerns are affecting stocks-just not at the index level. While the market-cap-weighted S&P 500 fell 0.5% in September, an equal-weighted version dropped 5% and is on pace for its seventh straight weekly loss, a losing streak previously seen only in 2002 and 2022.

It gets worse. Not since 2000 have more S&P 500 stocks made 52-week lows than 52-week highs when the overall index was within 2% of an all-time high, according to BTIG Chief Market Technician Jonathan Krinsky, an ominous sign for a market that has drawn more than a few comparisons to the dot-com bubble.

The divide in the market is wide and getting wider. Out of the 11 S&P 500 sectors, only information technology and communication services rose in September. Chips, though still down from their record high, contributed, too, with the PHLX Semiconductor Index surging 9.5% in September, while the Roundhill Magnificent Seven exchange-traded fund rose 4.3%. And it's impossible to overstate the impact of Meta Platforms, whose 27% September Muse-inspired rally added 0.6% to the S&P 500's monthly performance.

Some worry that this strange dynamic presages a broader decline for the S&P 500. Krinsky acknowledges that beaten-down sectors could bounce, but says the most likely scenario is that "the leaders succumb and major indexes catch down to what the majority of stocks have been doing." Famed bond investor Jeffrey Gundlach describes the problem in arboreal terms, telling David Rosenberg that like a particular century-old silver maple in his yard, the market has hollowed out after rotting from the inside and is now "on the edge of complete failure."

The market's bad breadth, however, looks quite different from other episodes of narrow markets. Investors aren't simply bidding up a small set of winners into nosebleed territory. Nvidia, the world's biggest stock, has seen its price/earnings ratio fall below the overall market's even as it has rallied 24% this year. Meta's valuation has fallen this year, as well, despite its September surge. That's in contrast to the dot-com bubble, when the valuations of heavyweights like Microsoft and Cisco Systems surged.

The poor breadth also looks more rational this time around. Rather than the bifurcation between the "old" and "new" economies seen during the dot-com bubble, investors are trying to gauge the winners and losers of AI in real time. Take the Meta rally. As that stock soared, shares of companies like Planet Fitness and New York Times stumbled, hit by fears that the new personal AI agent, Muse, will help paying customers cancel subscriptions to services that they no longer use. Charles Schwab and Bank of America, meanwhile, dropped over concerns that the technology would flush investor cash out of ultralow-yielding accounts. Investors aren't gripped by some speculative frenzy; they're articulating a holistic and reasonable thesis about the winners and losers in an AI-driven economy.

A similar dynamic is playing out elsewhere in the market. The surge in the price of diesel has benefited refiners like Valero Energy and Phillips 66, which hit fresh all-time highs last month, while air carriers like JetBlue Airways and American Airlines Group have been struggling. And while rising rates are generally negative for equities, a higher-yield environment is certainly harder on companies that have large amounts of floating-rate debt, or whose potential cash flows are many years away.

"Maybe the real theme," says John Marshall of Carrick Lane, "is that the trends that are most prominent in the market now all have winners and losers."

Perhaps the focus on market breadth, then, is missing the point. Owen Lamont, portfolio manager and researcher at Acadian Asset Management, says it's "crazy" to argue that the stock market is risky just because it's highly concentrated. "If you took the Magnificent Seven, and broke each into seven smaller firms so it was the Magnificent 49, why would that be any better?"

The historical record suggests that breadth isn't the bad omen that you might think it is. "It's always preferable to see a market rally on broad participation rather than a small group of stocks, and the durability of narrow rallies is more dependent on that narrow group of stocks," writes Bespoke Investment Group. "Contrary to popular wisdom, though, weak breadth alone hasn't been a reliable bearish short-term signal. In prior periods when breadth deteriorated but price held up relatively well, forward returns saw little in the way of a negative impact."

After all, indexes, unlike silver maples, are recomposable. As failing companies lose value, they are replaced within the index by up-and-coming names-not because the index masters are betting that these incoming companies will outperform the outgoing ones, but simply because they're striving to maintain an index that continually gives the most accurate read on the segment of the market in question, such as large-cap U.S. stocks in the case of the S&P 500. Out of the 500 companies originally included in the S&P 500 in 1957, only about 50 remain. Like Theseus' ship, the market keeps sailing on.

And the weather might soon get more temperate. Like Krinsky, Morgan Stanley Chief U.S. Equity Strategist Mike Wilson believes that "the divergence between the index and breadth must be reconciled," and he says the most likely scenario is that the overall market will slip in the weeks ahead. But he remains fundamentally bullish. "If bond volatility doesn't calm down, we see breadth and price meeting in the middle in the next month followed by a strong finish to the year," Wilson writes. "If bond volatility subsides sooner, breadth is likely to catch up to index price, driving both higher in the near term."

One thing that could calm the bond market is a resolution to the conflict in Iran. "I'm in the camp that we're going to find a solution in Iran," says KKM Financial CEO Jeff Kilburg. "I think we get out this month, and then we see crude oil crack, and we see rates crack," with the 10-year yield falling back below 5%.

Another catalyst: the start of earnings season. It's a truism on Wall Street that investors seem to worry about all of the macro headwinds during the months between earnings seasons, only to be reminded just how good they have it when the next crop of reports comes around. And third-quarter earnings season should be better than good. Analysts collectively estimate that S&P 500 will report year-over-year earnings growth of 29% for the quarter, which would mark the third-straight quarter of earnings growth about 25%, according to FactSet.

A cooling-off in oil prices and rates, "in conjunction with earnings season showing us yet more 25%-plus profit growth, is the catalyst for a run-up to 8000 in the S&P," Kilburg says, referring to a level 4.4% above Thursday's close.

Finally, the overhang of the midterm elections will pass after Nov. 3. "Historically, U.S. equity volatility has tended to rise in the months leading into the midterm elections," writes Dubravko Lakos-Bujas, head of global markets strategy at J.P. Morgan. Given that implied volatility has remained remarkably low, he does think there's room for the Cboe Volatility Index, or VIX, to rise from here. But he adds that the elections "should serve as an important market clearing event. Historical performance in the months following the midterms tends to be positive."

The great hope is that all of the major drivers of macro uncertainty will recede, while companies continue to report boffo earnings. That may be a bit too much to expect. But we do know that overall stock market valuations have fallen meaningfully this year, and have continued to decline during the past eight weeks of market churn.

Far from being complacent, investors are acutely aware of the pressures caused by rising rates, which is why the average stock has performed so poorly. In fact, according to Goldman Sachs, overall U.S. equity sentiment has fallen sharply into the negative, and is now as low as it was in March. As long as the AI narrative holds together, and earnings aren't terribly disappointing, the market is setting up for strong close to 2026.

Even if the rising tide doesn't lift every stock.