(Bloomberg) -- As the Big Tech hype cycle powered on, stock-market distortions on an epic scale were on full display this week, underscoring growing divisions between the haves and the have-nots across Corporate America.

While the Nasdaq 100 soared as Microsoft Corp. hit records and Nvidia Corp. surged anew, the enduring party in the blue-chip mega caps belies dispiriting performance across a slew of equity investment strategies sensitive to the economic cycle. Value stocks slid, small companies plunged and shares targeted by short sellers had their worst run since March.

Amid the churn was evidence that credit angst continues to dog Wall Street. Firms with the strongest balance sheets beat their shakier counterparts by the most in around four months, data compiled by Goldman Sachs Group Inc. showed, while high-yield bonds declined.

Taken together, the market swings show investors remain profoundly confused as to how the most aggressive interest-rate cycle in four decades will play out in earnings, the economy and corporate valuations. Yet all that angst is masked by the seemingly relentless advance in headline market-cap-weighted indexes — thanks to Big Tech euphoria. 

“We rally after Powell decides he’s closer to done even though it’s been obvious for months,” said Steve Sosnick, chief strategist at Interactive Brokers. “We sell off a little after he recalibrates, then rip higher anyway.”

The week extended a year-long trend in which the largest companies benefited from perceptions that their pristine balance sheets wall them off from the business cycle. While the S&P 500 gained more than 1% over the five days, including the best Friday rally since June, an equal-weight version — which effectively boosts the influence of non-megacaps — declined. 

Small-cap companies in the Russell 2000, a proxy for firms most reliant on bank financing, slid the most since September.

Credit stress is a hazard the largest stocks have mostly been spared in 2023 despite nearly a dozen Fed hikes — a benefit of borrowing cheaply during the pandemic and perceptions that corporate earnings remain strong enough to forestall solvency risk. But concern it will eventually mushroom keeps creeping into the market’s contour, particularly when prospects for a higher-for-longer rate cycle get a fresh airing. 

That happened Thursday, courtesy of a weak auction of 30-year bonds —and Fed Chair Jerome Powell’s assurance that the central bank will “not hesitate” to raise rates further should inflation warrant. Yields on 10-year Treasuries shot up, while the S&P 500 snapped what would’ve been its longest advance since 2004.

While investors are at pains to sort winners from losers should financing be curtailed, thus far it remains a threat big American companies are particularly well-equipped to endure. US companies at large have roughly 11 times the free cash flow of non-US companies in the MSCI All Country World Index, according to data compiled by JPMorgan Asset Management.

In fact, net interest expenses for US corporates have actually fallen by roughly 0.6% since 2021 relative to gross domestic income. Meanwhile interest costs for nearly every other G-10 country have risen in the same time frame, according to Deutsche Bank AG data that excludes the financial sector. 

“Despite 550 basis points of tightening, the US economy is about as interest-rate insensitive as it’s ever been,” said Phil Camporeale, portfolio manager of multi-asset solutions at JPMorgan Asset Management. “That is leading to the labor market staying resilient, and until claims move or payrolls go closer to zero, the Fed is not going to change their tone.” 

Yet the picture is less sanguine when you look past the corporate giants. While net interest payments may be down for the US corporate sector, costs have actually risen for firms outside the largest 150, data from Societe Generale SA show. 

No wonder smaller companies have been repeatedly walloped in 2023, pushing their discount to the likes of Apple Inc. and Microsoft Corp. to near-historic levels. 

Read more: S&P 500 Bulls Get Back to Believing Everything Is Just Perfect

“Unfortunately, it is not true for the vast majority of companies which are increasingly faced with rising interest expense as they need to refinance their debts,” said Marija Veitmane, a senior multi-asset strategist at State Street Global Markets.

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