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Top strategists warn trouble is brewing below the surface

Top strategists warn trouble is brewing below the surface

 


  • Market breadth is historically small by a number of measures.
  • Experts like David Rosenberg, Mike Wilson and Solita Marcelli warn that this could mean poor performance.
  • Just six stocks have powered nearly all of the S&P 500 returns this year, according to LPL Financial.

Six months into 2023, the S&P500 is having an impressive year, returning more than 11% since January.

But a closer look at the performance of the individual constituents of the index tells a different story than that of a recovering market. Here are the numbers:

  • Only six stocks in the S&P 500 Apple, Microsoft, Nvidia, Alphabet, Amazon and Meta have generated nearly all of the index’s returns this year, according to LPL Financial.

faangs market width 2023

LPL Financial



  • According to Bank of America, just 23% of S&P 500 stocks outperformed the broader index in May, good for the lowest monthly since 1986.
  • According to LPL Financial, only 44% of S&P 500 stocks are trading above their 200-day moving averages. It’s less than at least 80% of the time.
  • The equally weighted S&P 500 index significantly underperformed the market capitalization-weighted index. Year-to-date, the equally-weighted index is up only 1.3% from the S&P 500’s 11.7%. In the equally-weighted index, all constituents make up the same part of the index , unlike stocks with larger market capitalizations which represent a higher percentage of the index. This makes it a better indicator of market breadth.

Elevated market breadth is usually a sign that a rally has legs and that investors are fundamentally optimistic about the macro picture.

So a low width usually means investors should be wary of the sustainability of a bull run. With such low magnitude currently, some of the biggest names in the market are warning of an upcoming reversal for the S&P 500, especially at historically high valuation levels.

Here is David Rosenberg, the founder of Rosenberg Research and former chief economist for North America at Bank of America Merrill Lynch, in a June 1 note to clients: “All of a sudden we have leaders showing signs of struggle at these nosebleeding valuation levels and we know from experience that a choppy market in a low magnitude environment is not the combination that leads to bullish results.”

And here is Solita Marcelli, CIO at UBS: “Equity valuations remain elevated, with an unusually narrow breadth of rally. In our view, short-term equity upside remains limited. In addition, the outsized year-to-date gains of the NYSE FANG+ index (60%), which tracks the 10 most highly rated tech companies, underscores how narrow the recovery has been. been this year.”

She added: “Historically, narrow leadership has been a feature of late-stage bull markets rather than the start of a more protracted rally.”

Mike Wilson, CIO and chief US equity strategist at Morgan Stanley, contrasted the rally in the fourth quarter of 2022 with today’s, saying there were fundamental reasons for optimism last year as China was easing pandemic restrictions, but things are different now.

“Today, the scope is very narrow below the surface of the market. Technology and consumer are the only sectors up this year, and even they are showing a narrow scope,” he said. “Still, investors are more bullish than at the start of December, or at least much less bearish, given the optimism around the spread of technology, especially artificial intelligence. While AI is real and will likely lead to great efficiencies that will help fight inflation, it’s unlikely to prevent the deep earnings downturn we expect this year.”

Adam Turnquist and Jeffrey Buchbinder, LPL Financial’s senior technical and chief equity strategists respectively, looked at what the low range meant for performance over the following one-month, three-month, six-month and of 12 months. With just 44% of stocks above their 200-day moving averages, returns over the next few months look abysmal, at least by historical trends.

the extent of the market and subsequent performance

LPL Financial



“These data further support our thesis that broader participation will be needed for the S&P 500 to have a sustainable break above key resistance at 4,200.”

As stated above, there are different ways to measure market breadth. In a recent note, Savita Subramanian, Bank of America’s top U.S. equity strategist, looked at the years when the top 50 S&P 500 stocks by market capitalization outperformed the broader index, and what that meant for performance. later in the market. She found that in 73% of the years following the outperformance of the top 50, the market actually showed positive returns, leading her to push back against the idea that market breadth impacts performance.

“History suggests that low magnitude by itself is not a precursor to market weakness,” she said.

market place

Bank of America



Of course, the breadth of the market could improve if the fundamental economic outlook improves along with investor sentiment.

Investors are worried about a potential recession amid tightening credit standards and slowing consumer demand in the Federal Reserve’s most aggressive tightening cycle in decades. But lately, the economy has shown signs of resilience. Last week, the US economy added 339,000 jobs, more than the 190,000 economists expected.

If the labor market remains strong, a stock market recovery could become more sustainable. If the economy continues to slow, the few names holding the rest of the S&P 500 could find their legs too tired to withstand the mounting pressure from the rest of the market.

Sources

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2/ https://www.businessinsider.com/stock-market-crash-top-strategists-market-breadth-rosenberg-wilson-marcelli-2023-6

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