Are cracks forming in the stock market bull run?

Are cracks forming in the stock market bull run?

Over the past month, the US stock market has shown signs of shifting priorities. That’s because, surprisingly, the best-performing sectors weren’t the usual suspects. It wasn’t the high-flying artificial intelligence (AI), technology or defense industries, but the more stable and defensive healthcare, utilities and gold sectors. These sectors, seen as safe havens, suggest that at least some investors are bracing for turbulence.

It certainly begs the question: Are cracks forming in this bull market?

It may not be worth ignoring the recent outperformance of the S&P500’s healthcare, utilities and consumer staples sectors. That these sectors, known for their resilience in economic downturns – because they provide essentials like medicine, electricity and everyday goods, which tend to remain stable regardless of economic conditions – outperformed indicates a notable rotation in expectations.

Perhaps it is just a short-term reaction to the simultaneous increase in volatility.

On October 10, 2025, markets took a hit due to renewed trade tensions between President Trump and Chinese leader Xi Jinping. If The Wall Street Journal (WSJ) recently noted that some investors are showing increasing interest in China, “by withholding rare earths, attempting to smuggle crop diseases into the US to harm the food supply, pre-positioning electronic devices to cripple US telecommunications and emergency response systems, and subsidizing the production and export of chemicals used to make fentanyl manufacture.”

This month, the WSJ also noted: “Beijing’s standard scenario is to accept Western companies until it develops a credible challenger, then exclude Western companies from the Chinese market and flood overseas markets with Chinese goods.”

“China spends roughly 5 percent of its gross domestic product on industrial subsidies,” which amounts to a conquest economy that puts competitors out of business and makes them dependent on China.

Although the S&P 500 recovered quickly and was only 1.4 percent below the October 8 record, the undercurrents indicate caution.

Other defensive investments are rising

It appears that investors are also turning to traditional safe havens such as bonds and gold. The yield on ten-year government bonds has fallen almost half a percentage point in the past three months and has fallen below 4 percent for the first time in a year. Meanwhile, gold has soared to new all-time highs amid hedging against uncertainty.

Taken together, this month’s moves indicate increasing demand for assets that can weather economic and financial storms.

Warning signs

It is not just the defensive sectors that have performed better. Sectors linked to US economic growth are faltering. Regional banks, retailers, homebuilders and airlines have seen sharp declines over the past month.

And then there are the high-profile bankruptcies, including auto parts supplier First Brands and auto lender Tricolor. Their collapse has raised concerns about hidden weaknesses in the market, especially in the US private credit space, where a third of all loans were written by just three issuers.

Perhaps unsurprisingly, analysts studying the Distance to Default (D2D) measures point out that credit risk in the US is being underestimated and have raised the possibility of a sudden widening of BB spreads (junk bonds that demand higher yields). The ICE BofA US High Yield Index shows that the excess yield demanded for junk-rated corporate bonds has reached the highest level since June.

Major institutional investors BlackRock, M&G and Fidelity International have reportedly reduced their exposure to riskier corporate bonds and switched to safer corporate and government bonds. So while stock investors aren’t moving with the S&P 500 trading near record highs, corporate bond traders are revealing growing risk aversion in the credit markets.

JPMorgan Chase CEO Jamie Dimon’s recent comment to Charlie Munger, “If you see one cockroach, there are probably more,” reflects some investors’ concerns that the recent bankruptcies point to broader structural problems. That certainly seems to be the view among Wall Street traders who have seen Jefferies Financial Group, a lender to First Brands, fall 27 percent in a month, while also selling major private credit companies like KKR and Apollo Global Management.

A little optimism remains

Stock analysts estimate that S&P 500 companies will grow their profits by 16 percent over the next year. If they are right, that would be the same as the earnings growth resulting from COVID. And there are also interest rate cuts, which many are optimistic about the market effects.

And then there’s upcoming earnings from major tech companies, including Tesla, Netflix and Intel, along with consumer inflation data. But of course they are extremely short-term catalysts at best.

It is worth noting that the overall profit figure is increased by AI spending. In the real world, US consumer spending has reportedly stagnated despite expected tax cuts, and the labor market is said to be cooling as well.

With gold prices rising vertically and defensive sectors in the US market outperforming, one has to wonder if the bull market momentum is fading. The shift toward safety shows that some investors are preparing for a few bumps in the road ahead.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the founder and chairman of Montgomery Investment Management. Roger has more than three decades of experience in fund management and related activities, including equity analysis, equity and derivatives strategy, trading and securities brokerage. Before founding Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also the author of the best-selling investing guide to the stock market, Value.able – how to value and buy the best stocks for less than they are worth.

Roger regularly appears on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.

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