U.S. stocks delivered another strong performance on Friday, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all hitting record highs, reflecting sustained market optimism. Even the Russell 2000 index, a benchmark for small and mid-cap stocks that had long lagged behind, reached a record closing high on Thursday for the first time in nearly four years. However, the Russell 2000 experienced a slight pullback on Friday.

Amid this broad rally, the Dow Jones Transportation Average, a key index, bucked the trend by weakening. So far this year, the index has fallen nearly 2%, significantly diverging from the broader market and signaling potential risks.

The Dow Jones Transportation Average consists of 20 leading transportation companies, including airlines such as Delta Air Lines (DAL.US) and Southwest Airlines (LUV.US), railroad operators Union Pacific (UNP.US) and CSX Corporation (CSX.US), trucking firms Old Dominion Freight Line (ODFL.US) and J.B. Hunt Transport Services (JBHT.US), as well as delivery giants FedEx (FDX.US) and United Parcel Service (UPS.US). In February 2024, Uber (UBER.US) replaced JetBlue Airways (JBLU.US) in the index, symbolizing its representation of new economic transportation models.

According to Dow Theory, the transportation index and the industrial index must rise in tandem to confirm a healthy expansion phase in the market. A divergence between the two is seen as a precursor to weakening economic momentum or even a recession.

Tom Essaye, author of The Sevens Report, stated in Friday's market briefing: "If both are rising together, Dow Theory suggests this is a bullish signal, indicating the economy is in an expansion phase. But if there is a divergence, it means the economy is losing momentum and facing recession risks."

Esaye warned that the ongoing weakness in the transportation index could indicate that the current market rally is merely a "bull trap." He noted that the transportation index remains highly sensitive to the modern digital economy, especially in e-commerce supply chains, where FedEx, UPS, and railroad companies play critical roles, making the index an important economic leading indicator.

Adam Turnquist, Chief Technical Strategist at LPL Financial, pointed out in a research report that slowing global growth and uncertainty surrounding tariff policies are putting pressure on the transportation sector. These macroeconomic risks could eventually spread to the broader market.

He stated that the core issue is whether the weakness in the transportation index is merely a temporary adjustment or a sign that the recent breakout in the Dow Jones Industrial Average is a "false breakout," meaning the market rally lacks fundamental support.

Within the transportation sector, FedEx is considered a bellwether. The company reported solid earnings after Thursday's market close, and its stock rose over 2% on Friday, which was interpreted as a positive signal by the market.

Raphael Thuin, Head of Capital Market Strategies at Tikehau Capital, said: "Transportation stocks are the most sensitive to economic changes. If the market rotation continues, transportation stocks could become the main drivers of the next phase of gains."

However, FedEx's positive performance did not lift the entire sector. On Friday, the transportation index still edged lower, with UPS shares falling 1%. Analysts noted that unless more transportation companies report strong earnings and provide optimistic guidance, the current market rally may be unsustainable, and by year-end, it will become clear whether this rally is merely a "bull trap."