This S&P 500 sector gauge points to ‘excessive’ confidence and imminent pullback

Core Insights - The U.S. stock market closed higher, with the S&P 500 reaching a record peak, indicating strong investor confidence but suggesting a potential pullback may be near [1][4] - Low correlations among major S&P 500 sectors have historically preceded declines in the index, with past occurrences since 2023 leading to drops of 5% to 18% [2][4] - The current bull market, which began in late 2022 and early 2023, has seen sector correlations fall below 0.61, aligning with near-term tops for the S&P 500 [4][6] Market Sentiment - Excessive investor confidence is reflected in current S&P sector correlations, which are at unusually low levels, indicating a need for a catalyst to reset them to more rational levels [5] - Despite the U.S. government shutdown, which has limited the release of fresh economic data, the stock market appears to be resilient [5] Sector Analysis - The trailing 30-day price correlations for technology, industrial, consumer discretionary, financial, and healthcare sectors have recently fallen more than 2 standard deviations below the long-term average [3] - Specific correlation levels were recorded at 0.596 on September 24 and 0.607 on September 25, just below the critical threshold of 0.61 that has historically signaled an imminent pullback [6]