ORLANDO, Florida, Aug 5 (Reuters) - During an

extraordinary few days when the worlds of U.S. politics, policy,

economics and company earnings collided, the divergences that

run through the country's equity and bond markets have come into

sharp relief.

For the bond market, the split separates short-dated

Treasuries that price off the Fed's policy rate and longer

maturities that are more sensitive to U.S. debt and deficit

concerns.

And for the benchmark S&P 500, that line is between the

'Magnificent Seven', along with a few other tech and artificial

intelligence-focused megacaps, and everyone else.

These types of divides have always existed to some extent,

but they have become more apparent this year given the historic

concentration on Wall Street and rapid deterioration in the U.S.

fiscal outlook.

The dramatic moves in U.S. assets over the last few days

serve as a microcosm of these deeper divergences.

LONG AND SHORT OF IT

The split in the bond market burst open on Friday.

Triggered by surprisingly weak jobs figures and President

Trump's shock decision to fire a senior official in the agency

responsible for collecting the data, the two-year Treasury yield

plunged 25 basis points and the 2s/30s yield curve steepened by

20 basis points. These were the biggest moves in one year and

two and a half years, respectively.

The slump in yields, especially at the short end of the

curve, indicates that investors' supposed concerns about fiscal

indiscipline quickly evaporate as soon as growth-sapping cracks

in the labor market appear. So much for the bond vigilantes.

Tellingly, there was no pullback on Monday. Indeed, Treasury

prices climbed even higher, pushing the two-year yield as low as

3.66%, its nadir since May.

Long-dated yields have declined too, but not as

aggressively, resulting in Friday's dramatic steepening of the

2s/30s curve to levels that, with the exception of April's brief

tariff tantrum, haven't been seen for more than three years.

Investors may wince at the size of the federal debt and the

Treasury's funding needs but still want to load up on two-year

bonds when they think rate cuts are coming. This parallel

thinking isn't new, but the stark difference in the narratives

driving the front and back ends of the curve is notable.

STAY NIMBLE

The U.S. equity market concentration story is familiar to

everyone by now, but the last few days underscore how

jaw-dropping - and seemingly entrenched - it is.

Blockbuster earnings reports from 'Mag 7' constituents Meta,

Microsoft and Apple juiced another wave of outperformance in Big

Tech stocks, reviving debate about concentration risk, bubbles

and the long-term benefits of AI.

By some measures, a few Big Tech firms now account for as

much as 40% of the total U.S. stock market cap. Tech is more

expensive relative to the broader S&P 500 index than ever, even

compared to the dotcom bubble, according to Bank of America.

Wall Street's average valuations and earnings growth are

therefore increasingly being driven by Big Tech. Strip out the

top 10 firms, and the rump S&P 490 has barely registered any

earnings growth in the last three years, according to SocGen's

Andrew Lapthorne.

Again, there are multiple narratives at work here. It may be

true that overseas investors want to reduce their U.S. equity

exposure, but don't want to miss out on the Big Tech boom. So

even if foreign investors start shedding some U.S. assets - and

that's debatable - they aren't apt to be jettisoning the likes

of Nvidia and Microsoft.

This is a delicate juncture for investors. Wall Street is at

record highs, but concentration risk has also rarely been

higher. The outlook for long-dated bonds is worrying given

current fiscal and inflation dynamics, yet the short end looks

much more attractive, though even that is complicated by the

economic and unique political pressures bearing down on the Fed.

The divergences in U.S. markets may narrow, gradually or

suddenly, or they may continue unabated for some time. Without a

crystal ball, it's tough to know exactly what the catalyst for

mean reversion would be.

One thing is likely guaranteed though: in this environment,

it will pay to be nimble.

(The opinions expressed here are those of the author, a

columnist for Reuters)

(By Jamie McGeever

Editing by Susan Fenton)