Key facts
- The S&P 500 has seen its gains heavily concentrated in a few AI-focused companies.
- Market breadth, the percentage of winning stocks in the S&P 500, is at an all-time low.
- 84% of S&P 500 companies are trading at least 10% below their all-time highs.
- Apple, Microsoft, and Nvidia now represent about 22% of the S&P 500's market cap.
- Samsung expects an operating profit of $80 billion for the third quarter, potentially its highest ever.
- Falling bond yields could improve market breadth, according to Morgan Stanley.
The sustainability of the current four-year bull market in stocks is being questioned due to a significant concentration of gains in a few AI-focused companies, a phenomenon known as narrow market breadth. Since the market bottom on October 12, 2022, enthusiasm for AI has been a primary driver, but this has led to concerns that the rally is not broadly supported.
Recent trends show an even greater narrowing of market leadership. While the 'Magnificent Seven' were once the main engine of stock gains, the focus has now intensified on Apple, Microsoft, and Nvidia, which collectively account for approximately 22% of the S&P 500's total market capitalization, an increase from about 14% in late 2022. Other areas, such as memory stocks and chipmakers, have also seen strong performance, further highlighting the dominance of a few key companies.
According to Ned Davis Research, market breadth, which measures the percentage of stocks in the S&P 500 participating in the upward movement, is at an all-time low relative to the index's performance at record highs. Historically, such deviations have preceded market peaks within months. An analysis by The Kobeissi Letter revealed that since the start of 2024, a basket of 42 AI stocks has generated 67% of the S&P 500's price return, contributing +22 percentage points to the index's +33% gain, while the remaining 458 stocks added only +11 percentage points.
This concentration means that a significant portion of the market is struggling, with 84% of S&P 500 companies trading at least 10% below their all-time highs, effectively placing the majority of stocks in correction territory despite the index's record levels. This divergence occurs amid geopolitical tensions, rising bond yields, and economic uncertainty.
Mark Hackett, chief market strategist at Nationwide, noted that while earnings and AI investments provide strong support for growth stocks, high long-term rates, inflation risks, and narrow breadth leave little room for error. Some interpret this as a reflection of where profits are being made, with AI and tech companies reporting strong earnings, such as Samsung's projected $80 billion operating profit for the third quarter.
Morgan Stanley suggests that a potential remedy for the poor market breadth could be a decline in bond yields. The firm observed that market breadth deteriorated after the Federal Reserve's hawkish stance at the Jackson Hole symposium, which led to higher rate expectations and contributed to Treasury yields reaching 24-year highs. "If bond volatility subsides sooner, breadth is likely to catch up to index price, driving both higher in the near term," wrote Mike Wilson, CIO at Morgan Stanley. He added that the near-term question for equity investors is whether this divergence will spill over into equity volatility, which has remained calm, and that this will determine how the breadth-index divergence is resolved.