The broader stock market rally was thwarted by the index hitting a record level last month.
More than 75% of the S&P 500's gains in May were driven by just six big tech stocks, a move reminiscent of how the “Magnificent Seven” tech stocks drove the market rally in 2023.
The S&P 500 (^GSPC) posted its best May since 2003, driven by gains in stocks of Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META) and Nvidia (NVDA).
“The market is relatively narrow and has become even narrower recently, primarily due to a smaller number of names,” Yun Yu Ma, U.S. chief investment officer at BMO Wealth Management, told Yahoo Finance. “This is not good for the health of the market.”
The participation of 493 other stocks in the S&P 500 has been characteristic of moves toward record highs over the past six months, including late 2023 and near the end of the first quarter. In May, the S&P 500 rose about 4%, while the equally-weighted index rose less than 2%. In the first quarter of this year, the difference between those two indexes was closer to 0.5%.
But since stocks bottomed out following the S&P 500's 5% drop that ended in mid-April, the market has become dominated by Big Tech again.
The Nasdaq Composite Index (^IXIC) posted its best May in more than two decades, driven by a roughly 30% rise in Nvidia shares over the past month.
Bank of America investment strategist Michael Hartnett noted that the relative price performance of the equal-weighted S&P 500 (^SPXEW) versus the market-cap weighted S&P 500 is at its lowest since March 2009 after rebounding last year.
This narrow leadership caused the breadth, or the number of advancing stocks minus the number of declining stocks, to fall toward the lower end of the historical range.
Data from Bespoke Investment Group released last Thursday showed that share price volatility over the past 10 trading days has fallen to its lowest since 2002, meaning that more than 90% of the time, the market has more stocks rising than were dominant in late May.
But the firm noted that this range of levels often portends the strongest returns for any given 10% bracket over the following three-, six- and 12-month periods.
“Several market breadth measures” have not tracked the recent rally, Ed Clissold, chief U.S. research strategist at Ned Davis, wrote in a client note.
This could be a concern if the small leadership shown by big tech companies over the past month crumbles, which Clissold says happens sometimes when a market rally is at its peak.
“The bottom line is that while some divergences have been building all year, most have only emerged in recent weeks,” Clissold wrote. “If the market is peaking, it is likely still early days. The evidence has not changed enough to warrant adjusting our overweight recommendation on U.S. equities.”
Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, cited several factors that should worry investors and called the recent move a “sudden stall” in the rotational trade, in a client note on Monday.
Rising Treasury yields are once again acting as a headwind for the stock market, pushing many investors toward large-cap stocks, and fundamentals are also very favorable for this group, with earnings for large tech stocks having revised upward in recent weeks, Calvasina noted.
The changes come as outlook for the resilience of the U.S. economy, which could grow faster than expected this year, is taking a hit.
First-quarter economic growth was revised down in the last week of May, while the latest manufacturing activity report from the Institute for Supply Chain Management showed that manufacturing activity contracted further last month.
Looking at factors that could revive the rotation trade, Calvasina said: “Our research suggests that the rise in 10-year Treasury yields (^TNX) needs to stop, the market needs more clarity and certainty on the direction of monetary policy and the timing of rate cuts, market-wide earnings performance needs to improve enough to be viewed as better than the largest growth stocks, and economic vitality needs to return.”
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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