The broadening of the stock market rally fell by the wayside as the index reached record levels last month.
Just six large tech stocks contributed to more than 75% of the S&P 500’s gain in May, a move reminiscent of how the “Magnificent Seven” tech stocks drove the market rally in 2023.
Rises in Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA) helped the S&P 500 (^GSPC) to its best May since 2003.
“We’re seeing a relatively narrow market, and that narrowness has been increasing recently and really driven by fewer stocks,” BMO Wealth Management US chief investment officer Yung-Yu Ma told Yahoo Finance. “That’s not what you want to see for market health.”
Participation from the other 493 stocks in the S&P 500 had been a feature of runs toward record highs in the last six months, including late 2023 and near the end of the first quarter. In May, the S&P 500 rose about 4%, while the equal-weighted index was up less than 2%. In the first quarter of the year, the spread between these two indexes was closer to 0.5%.
But since stocks bottomed out after a 5% pullback in the S&P 500 that ended in mid-April, the market has once again been all about Big Tech.
The Nasdaq Composite (^IXIC) posted its best May in over 20 years, led by nearly a 30% jump in Nvidia stock over the past month.
Bank of America investment strategist Michael Hartnett noted the relative price performance of the equal-weighted S&P 500 (^SPXEW) against the market-cap-weighted S&P 500 is at its worst level since March 2009 after a rebound last year.
This narrow leadership has seen breadth — or the number of stocks advancing minus the number of stocks declining — fall toward the low end of its historical range.
Data from Bespoke Investment Group published last Thursday showed breadth over the previous 10 trading days had fallen to the lowest decile of performance going back to 2002. Meaning that over 90% of the time, the market sees more stocks participating in gains than what predominated in late May.
The firm did note, however, that breadth at these levels often portends the strongest returns of any decile over the following three-, six-, and 12-month periods.
Ned Davis Research chief US strategist Ed Clissold wrote in a note to clients that “several market breadth indicators” haven’t followed the recent rally higher.
This could be a point of concern if the narrow leadership from Big Tech over the last month falls off. According to Clissold, this sometimes happens when market rallies peak.
“The bottom line is that while some divergences have been developing all year, most only presented themselves in recent weeks,” Clissold wrote. “If the market is in a topping process, it is likely in the beginning phases. Not enough evidence has changed to warrant adjusting our overweight recommendation to US stocks.”
In a note to clients on Monday, RBC Capital Markets head of US equity strategy Lori Calvasina called this recent action a “sudden stall” in the rotation trade, citing a few catalysts giving investors reason for concern.
A rise in Treasury yields has once again become a headwind for stocks, pushing many investors to lean on large-cap stocks. This also comes as the fundamental story has been most impressive for that group as well, with earnings being revised higher for large-cap tech stocks in recent weeks, Calvasina noted.
These shifts have happened as the story of a resilient US economy that could grow more than expected this year has been taking hits.
A reading on first quarter economic growth was revised lower during the last week of May, while the latest look at manufacturing activity from the Institute for Supply Management showed activity fell further into contraction last month.
And in describing what could revive the rotation trade, Calvasina wrote, “Our work suggests that the 10-year yield (^TNX) needs to stop rising, the market needs more clarity and certainty around the path of monetary policy and the timing of cuts, earnings trends need improve for the broader market such that they look better than the biggest growth names, and economic excitement needs to return.”
