Dear Trader,
On Thursday at the lows, the S&P 500 sat down 80 points. By the close, it had clawed back half that loss, finishing down just 40 points at 6,908. But the real story isn't in the cap-weighted index. It's in what the average stock is doing.
Take a look at RSP, the equal-weight S&P 500 ETF. It closed near all-time highs. That tells you everything you need to know about what's actually happening in this market.
This is a correction, but not the kind you're used to.
NVIDIA Corporation (NVDA) reported earnings Wednesday night and they crushed it. Revenue surged 73 percent to $68.1 billion, beating Wall Street's $65.9 billion estimate. Earnings came in at $1.62 per share versus expectations of $1.53. Guidance blew past forecasts too, with management calling for $78 billion in first-quarter sales against the $72.8 billion consensus.
And the stock dropped 5.5 percent anyway, marking its worst day since April.
Why PE Tells the Real Story
The answer isn't complicated. Two years ago, when AI was just becoming a thing, NVDA's PE ratio topped 70. Today it sits around 46. According to FinanceCharts data, the five-year average PE for the stock is over 70, so the current multiple represents significant compression.
That number will eventually land in the high 20s or low 30s. NVDA had a historic run until November 2024. Since then, the stock has essentially gone sideways. TradingView analysis confirms the stock has spent the past six months consolidating rather than making new highs.
This is what a "time correction" looks like. The earnings aren't disappointing. They're growing into a valuation that already priced in incredible results. The reward for NVDA is becoming the most valuable company in the world. But the multiple had to compress first.
The Great Rotation Is Here
Meanwhile, the rest of the market is waking up. Market breadth has reached its healthiest levels in over three years, with 65.8 percent of the S&P 500 now trading above their 200-day moving averages.
The Magnificent Seven dominated returns for years. At one point, the top ten stocks accounted for over 40 percent of the S&P 500's total weight. That concentration historically precedes either a correction or a rotation.
We got the rotation.
Money is flowing out of mega-cap tech and into the "other 493" stocks. Domestic manufacturing, regional banking, industrials. The Russell 2000 has surged nearly eight percent in the first five weeks of 2026 while the Nasdaq 100 limped along with a 1.5 percent gain.
What I'm Doing Now
Looking ahead to today, PPI matters, but not like other data releases. Tuesday and Wednesday were a market-wide short squeeze because no one wanted to be short heading into NVDA earnings. That squeeze is over.
Based on what I'm seeing in bonds and VIX, I think we're heading for a rough Friday and Monday before forming a constructive bottom.
Here's my positioning:
Buying: Reddit (RDDT), Microsoft (MSFT), IBM (IBM), energy, Amazon (AMZN), banks.
Selling: Apple (AAPL), Target (TGT), non-Microsoft software, private credit lenders, crypto companies including MicroStrategy (MSTR).
Today I expect the market to be soft.
I'll look for chances to press it lower. We're finally set up for that capitulation moment. It might take a few days, but it's coming. And when it arrives, it'll be a generational long opportunity.
Your only option,
Mark Sebastian