A handful of stocks have driven much of this year’s rally. That’s becoming a serious problem on the way down.

Stock-market strategists have been complaining about the dangers of a lopsided U.S. equity market all year. Now it looks like those concerns are finally being validated as the market sinks, with the best performers leading the way lower.

“The bottom line is that if you buy the S&P 500 today, you are basically buying a handful of companies that make up 34% of the index and have an average [price-to-earnings] ratio around 50,” Slok said in emailed commentary. While the valuation gulf between the Magnificent Seven and the rest of the U.S. equity market didn’t pose much of a problem on the way up, it could exacerbate losses now that stocks are caught in a downdraft driven by rising Treasury yields, according to an analysis of historical market data by BTIG’s Jonathan Krinsky.

What he found seemed ominous enough: As lopsided markets fall back to Earth, there’s the potential for losses to accelerate. There have only been five times when the market met all three criteria: August 1998, January 2000, September 2007, October 2018 and March 2020. In almost every example, a more prolonged and punishing downturn ensued.

As the yield on the 10-year Treasury note BX:TMUBMUSD10Y climbs to fresh 16-year highs on Monday, many analysts are questioning whether increased competition in bonds will continue to lure capital away from stocks.

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