The market is rewarding companies that lose money while ignoring profits

by

Something weird is happening underneath this rally.

The companies making the most money are not always the ones getting rewarded.

In the Russell 2000, unprofitable companies have jumped around 60% since April 2025.

Profitable companies?

Up about 38%.

The entire Russell 2000 is up around 48%, beating the S&P 500 at about 38%.

On the surface, that looks like a strong market.

But underneath, the message is different.

Investors are chasing the story.

AI.

Future growth.

The next big winner.

And some companies with weak earnings are getting rewarded more than companies already producing real profits.

That is usually when markets get interesting.

Because eventually someone has to ask:

Are investors buying businesses?

Or are they buying the idea of what those businesses could become?

The AI trade is also showing more stress.

The Nasdaq volatility ratio compared with the S&P 500 reached around 1.65, the highest level since 2017.

That means investors are paying much more for protection against big moves in technology stocks.

At the same time, market breadth looks weaker.

A smaller group of large companies is carrying much of the rally.

Volume is lighter.

Retail investors are still chasing.

Meanwhile, some bigger players are becoming more cautious.

Then comes another surprise:

Bank of America moved from expecting no Federal Reserve rate cuts to expecting three hikes this year.

The reason?

Stronger economic data and a more hawkish Fed under Kevin Warsh.

So the market has this strange combination:

Record highs.

Huge AI optimism.

Money flowing into speculative companies.

But also rising fear underneath.

That is usually when the gap between what investors believe and what the market can actually deliver starts getting tested.