David Randall
NEW YORK (Reuters) – As the index soared to new highs, fewer stocks took part in the rally, raising concerns that recent gains could be reversed if market leaders falter.
Strong market breadth, or the number of stocks participating in a broader index gain, is often seen as a healthy sign by investors because it shows returns are less dependent on a small group of companies.
Market breadth has been narrow for most of 2023, with the S&P 500’s 24% gain driven primarily by the so-called “Magnificent Seven,” a group of heavyweights that includes Meta Platforms (NASDAQ:), Apple Inc (NASDAQ:). and Amazon (NASDAQ:).
Coverage improved by the end of the year, but some indicators suggest it will narrow again in 2024. and the Nasdaq index, which hit new highs, fell to its lowest level since July, data from Hi Mount Research showed.
At the same time, only 62% of large-cap stocks were above their 50-day moving average as of Thursday’s close, down from 87% in December, according to Thrasher Analytics. Meanwhile, the Magnificent Seven accounted for nearly 60% of the S&P 500’s gain this year, according to the Dow Jones Indices.
“We’re at an all-time high in the amount of money in this very small number of stocks,” said Michael Smith, senior portfolio manager at AllSpring Global Investments.
The narrow group of stocks fueling the market could make it more vulnerable to a rapid decline if earnings disappointment or other problems hit its largest stocks, said Smith, who owns shares of Microsoft (NASDAQ:), Amazon and Google parent Alphabet (NASDAQ:). (NASDAQ: ).
While most mega-cap stocks have risen this year, Tesla (NASDAQ:) shares are down 22%, the third-worst performance in the S&P 500, showing how quickly market superstars can fall out of favor.
Some investors believe the range has narrowed in part because markets now expect the Federal Reserve to cut rates later this year than many on Wall Street had expected, forcing a shift away from rates in rate-sensitive sectors that could benefit from reducing borrowing costs.
For example, the S&P 500 real estate sector is down 4.4% year to date on concerns about commercial real estate. The small-cap index fell 0.8%.
“Some areas of the market that were really oversold saw strong gains in anticipation of a quick Fed rate cut in 2024,” said Ed Clissold, chief U.S. strategist at Ned Davis Research. “Now that the market has repositioned itself, people are rethinking how much these devastated areas should rally.”
Fed Chairman Jerome Powell last month dismissed hopes of a rate cut immediately after its March meeting, saying the central bank needed more confidence that inflation was returning to its 2% target.
Overall, markets late Friday were forecasting a cumulative interest rate cut of about 110 basis points by the Fed’s December meeting, compared with more than 160 basis points expected at the end of 2023.
Investors are awaiting US consumer price data next week to see whether recent US growth will trigger an inflationary rebound, which is likely to force further rate cuts.
There is an argument for sticking with the market’s largest companies, which often have above-average growth and strong balance sheets. Since 1999, the 10 largest S&P 500 companies by weight have returned an average of 12.3 percentage points more than the broader index, according to Dow Jones Indices.
At the same time, some strategists believe that a longer-term view shows that more stocks actually participated in the rally. More than half of the more than 100 subsectors that make up the S&P 500 are up 20% or more since the current bull market began in October 2022, Yardeni Research analysts wrote. However, technology and communications services are the only ones to outperform the broader index.
“Some stocks outperformed laggards significantly, but many of the laggards also outperformed, but not as well,” the firm wrote.