The S&P 500 has been setting record highs in recent days, a dramatic turn from the market selloff back in April. But analysts are warning fortunes could change if overall market participation in the rally holds at the current rate.
The new heights the S&P is reaching are being undermined by narrow company participation in those highs, according to a July 5 report from Ari Wald, head of technical analysis at wealth and investment management firm Oppenheimer & Co., and first reported by Bloomberg. Referred to as market breadth, analysts often try to see how many companies in a specific index or sector are participating in a rally to gauge how healthy it really is.
That is important to track, says Wald, because narrow participation can mask underlying weakness in the market: Since 1972, the S&P 500 has posted below-average returns over the next one-, three-, six-, and 12-month periods when its all-time high coincides with fewer than 100 companies on the New York Stock Exchange (NYSE) also hitting new highs, the analysis finds. At the last market high, 88 companies on the NYSE also hit a high.
Indeed, big tech companies have been the drivers behind the recent market heights: Just five stocks—Amazon (AMZN), Broadcom (AVGO), Meta (META), Microsoft (MSFT), and Nvidia (NVDA)—are contributing over half of the S&P 500’s total return, according to an analysis from Adam Turnquist, chief technical strategist for LPL Financial. It’s always a concern when just a few companies are responsible for most of the gains—because that means those gains could easily turn into losses depending on the strength of just a handful of companies. That’s what happened in mid-2023, when a Magnificent Seven–driven rally faded.
