THIS RALLY IS ALL ABOUT A FEW STAR STOCKS -- AND SOME INVESTORS ARE WORRIED / THE WALL STREET JOURNAL

This Rally Is All About a Few Star Stocks—And Some Investors Are Worried

Investor exuberance about Big Tech has helped buoy the U.S. market, but some warn that may be masking trouble

By Caitlin McCabe

Eight technology companies recently accounted for 30% of the S&P 500’s market value, up from 22% at the start of the year. PHOTO: MICHAEL NAGLE/ZUMA PRESS

Major indexes have overcome a series of challenges to power higher this year. 

But some investors are worried that this performance rests on just a few heavyweight stocks. 

The S&P 500 has climbed 11% this year and is poised to enter a new bull market after rising almost 20% from an October trough. 

Most major indexes in Europe are up more than 10% in 2023, with France’s CAC 40 among those that are hovering near all-time highs. 

The performance has surprised asset managers who began the year on the sidelines amid concerns about the trajectory of interest rates and the global economy. 

Indexes have shrugged off a banking crisis and debt-ceiling standoff in the U.S., and worries of recession in Europe. 

But for some investors and analysts, things don’t look so cheery below the surface. 

Market breadth, which reflects how many stocks participate in a rally, has narrowed, signaling possible trouble ahead.

“If you look at the S&P 500 index level, you might be fooled into thinking that actually the market is doing really well, that activity is strong and that profit growth is in full recovery mode,” said Seema Shah, chief global strategist at Principal Asset Management. 

“But that would be quite an incorrect reflection of what’s going on under the surface.”

The past few years have been periodically marked by U.S. technology-stock dominance. 

But that grip has tightened recently.  Eight of the largest tech and growth companies in the U.S.—Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Tesla and Nvidia—now account for 30% of the S&P 500’s market capitalization. 

That is up from about 22% at the start of the year. 

One sign of narrowing breadth can be seen in how the S&P 500 has fared this year compared with its equally weighted counterpart, which gives equal sway to every company in the index. 

Compared with the traditional index’s 11% gain, the equally weighted version has added 1.1%. 

That is the largest-ever outperformance by the S&P 500 on a year-to-date basis, according to a Dow Jones Market Data analysis through June 5, based on data starting in 1990.

Other indicators of market breadth have also flashed warning signs. 

The share of S&P 500 stocks closing above 200-day moving averages fell as low as 38% last week. 

A market is generally considered healthier when more stocks are rising together, and history shows that broader rallies are typically more sustainable.

In contrast, limited breadth can often precede a downturn. 

S&P 500 returns over the next month, three months, half-year and year tend to be negative when fewer than 48% of stocks are trading above their average over the past 200 days, according to an analysis by Adam Turnquist and Jeffrey Buchbinder of LPL Financial, based on data starting in 1991.

Lately, strategists have warned that a narrowing breadth is masking investor anxiety. 

Money managers have dumped shares of companies operating in economically sensitive industries, sending stocks as varied as Etsy, Boston Properties and Charles Schwab each down more than 25% this year.

Instead, investors have piled into mega-cap tech stocks such as Alphabet and Nvidia, excited by the buzz surrounding artificial intelligence and betting that technology companies’ strong balance sheets will prove resilient if the economy suddenly goes sideways. 

Nvidia has more than doubled this year, while Alphabet has climbed 43%.

The outsize influence of a few star stocks can leave the stock market vulnerable to a quick unwind if the tech sector suddenly stumbles or falls from favor, strategists say. 

That happened in September 2020, when a sudden reversal in tech shares pushed the S&P 500 down nearly 10% in three weeks. 

On its own, narrowing breadth doesn’t necessarily mean that a rally will end, said Altaf Kassam, head of investment strategy and research for Europe, the Middle East and Africa at State Street Global Advisors. 

Plus, some signs of market breadth have improved in the past few trading sessions. 

“You have had rallies in the past that have surprised on very narrow breadth,” he said. 

But, “the worry with a narrow rally is that when it turns, it turns very violently.”

Similar to the U.S., a few standouts are helping drive European markets higher, albeit largely in luxury rather than tech. 

These stocks include France-based luxury-goods companies LVMH Moët Hennessy Louis Vuitton and Hermès, which have gained 20% and 33% this year, respectively. 

Across Europe, 43% of Stoxx Europe 600 stocks closed above 50-day moving averages on Monday, while only 20% of shares in France’s CAC 40 crossed the threshold.