S&P 500’s Record Highs Mask Concerns over Narrowing Market Breadth and Potential Reversal

10 February 2024 - 332 views

The S&P 500 hitting record highs has raised concerns as fewer stocks are participating in the rally. Market breadth, or the number of stocks contributing to the index’s rise, has narrowed, indicating a potential reversal of recent gains. The “Magnificent Seven” heavyweights have accounted for a significant portion of the S&P 500’s increase. Experts warn that a downturn in these leading stocks could result in rapid declines for the market. The narrowing breadth may be attributed to expectations of delayed rate cuts by the Federal Reserve and concerns about commercial real estate. However, some believe that more stocks have actually participated in the rally when taking a longer-term perspective.

[Deflationary Scenario]
[Significance: Low]

1. The S&P 500 has reached record highs, but fewer stocks are participating in the rally, raising concerns about the sustainability of the gains.
2. Market breadth, which measures the number of stocks rising in an index, has been narrow in recent years, with only a few heavyweights driving the market’s growth.
3. Market breadth has recently shown signs of narrowing again in 2024, with fewer stocks hitting new highs and a decrease in the percentage of large-cap stocks above their moving averages.
4. The concentration of gains in a small number of stocks could make the market more vulnerable to declines if these stocks underperform or face negative catalysts.
5. While some argue that the narrowing breadth is due to expectations of a delayed rate cut by the Federal Reserve, others believe that more stocks have actually participated in the rally, although not as strongly as the market leaders.