Narrowing Market Breadth Raises Concerns About Latest Stock Rally
Market Breadth Suggests Potential Reversal of Recent Gains
The soaring stocks of the market have raised concerns about the narrow participation in the rally, which could potentially lead to a reversal of recent gains if the market leaders stumble.
Healthy Sign for Investors
Investors often view strong market breadth as a healthy sign, indicating that gains are less reliant on a small cluster of names. In 2023, market breadth was narrow, with the S&P 500’s 24% gain primarily driven by a group of heavyweights.
Narrowing Market Breadth in 2024
Market breadth had shown signs of improvement towards the end of the year, but measures indicate a narrowing once again in 2024. For instance, while the S&P 500 hit a record high, the number of stocks hitting new highs has fallen to its lowest level, and only 62% of large-cap stocks stood above their 50-day moving average as of Thursday.
Vulnerability of Market
The historic extreme in the amount of money in a very small number of stocks could make the market more vulnerable to swift declines if an earnings disappointment or other issue hits its biggest stocks.
Factors Contributing to Narrowing Breadth
Some investors believe that markets anticipate the Federal Reserve cutting rates later than expected, leading to an unwind of bets in rates-sensitive sectors that could benefit from lower borrowing costs. This shift in market stance is causing a rethink in how much these beaten-down areas should rally.
Uncertainty Surrounding Rate Cuts
Fed Chairman Jerome Powell’s recent statement, shooting down hopes for rate cuts as soon as the March meeting, has created uncertainty. Markets are now pricing in cumulative interest rate cuts of around 110 basis points by the Fed’s December meeting, down from more than 160 basis points anticipated at the end of 2023.
Long-Term Look at Market Trends
While a few stocks have greatly outperformed others, more stocks have actually participated in the rally when viewed from a longer-term perspective. Technology and communications services are the only sub-industries in the S&P 500 to have outperformed the broader index.
Sticking with Big Companies
There is an argument for sticking with the market’s biggest companies, which often have above-average growth and strong balance sheets. Since 1999, the top 10 companies by weight in the S&P 500 have returned an average of 12.3 percentage points more than the broader index.
