S&P 500 hits records amid concerns over narrowing market breadth

Wall Street ahead: Market breadth, the measure of how many stocks contribute to a market's rise, indicates a narrowing rally as the S&P 500 hits record highs. While the index has surged, fewer stocks are participating in the upswing, raising concerns that reliance on a handful of leaders could lead to a reversal of recent gains.

In 2023, market breadth remained narrow, with a major portion of the S&P 500's gains attributed to a select group of heavyweights including Meta Platforms, Apple, and Amazon. 

Although breadth improved towards the end of the year, recent data suggests a narrowing trend in 2024. For instance, despite the S&P 500 reaching new highs, the number of stocks on the NYSE and Nasdaq hitting new highs has declined considerably.

Furthermore, only 62 per cent of large-cap stocks are currently above their 50-day moving average, down from 87 per cent in December. 

Notably, the Magnificent Seven have accounted for a notable portion of the S&P 500's gains this year, amplifying concerns about market dependence on a few key players.

Experts warn that the market's reliance on a narrow group of stocks could increase vulnerability to sudden declines, particularly if there are earnings disappointments or other issues affecting major companies. 

Tesla's recent 22 per cent decline underscores the volatility of even the market's leading performers.

Some attribute the narrowing breadth to shifting expectations around Federal Reserve rate cuts, with markets now anticipating a delay in rate cuts compared to previous projections. 

This has led to reevaluation of investments in rate-sensitive sectors and impacted indices like the S&P 500 real estate sector and the Russell 2000 index.

While many argue for staying invested in the market's largest companies due to their growth prospects and strong balance sheets, others point out that a longer-term view reveals broader participation in the rally across various sub-industries.

While the market celebrates new highs, the narrowing breadth raises cautionary flags, reminding investors to consider the resilience and diversity of their portfolios amidst evolving market dynamics.

(With Reuters Inputs)