U.S. stocks face breadth test as S&P 500 nears record high
A widening gap between the S&P 500’s headline resilience and weakness across most of its constituents is putting the U.S. equity market at a pivotal point. While benchmark indexes remain close to peaks, many strategists argue a rotation beyond mega-cap leaders can still stabilize broader market performance in the coming months.
Highlights
- The S&P 500 is near a record while the median S&P 500 stock remains down 16%, highlighting persistent market breadth divergence.
- Goldman Sachs assesses market breadth at its lowest since the DotCom Bubble but still forecasts S&P 500 gains over the next three months.
- Deutsche Bank downgraded the technology sector citing crowded trades and high earnings expectations, projecting possible rotation into small caps and other sectors.
Market divergence and rotation outlook
As reported by CNBC, Wall Street is increasingly focused on the split between an S&P 500 hovering just below a record and the median stock in the index sitting in a 16% drawdown. That divergence is shaping expectations that a recent tentative improvement in the majority of stocks can help investors who are less exposed to the biggest technology names.Strategists at several major banks are still leaning toward a constructive outcome. Goldman Sachs co-head of equity-derivatives sales Lee Coppersmith says the firm’s preferred measure shows market breadth has weakened to its poorest level since the DotCom Bubble, but he does not see the narrowness as a broader warning sign and continues to favor gains in the S&P 500 over the next one to three months.
Morgan Stanley equity strategist Mike Wilson says higher Treasury yields have disrupted the case for broadening market performance driven by wider earnings growth. Even so, he argues that much of the rate pressure is already reflected in average stocks, leaving room for a catch-up move if yields stabilize and earnings revisions hold.
Deutsche Bank strategists, while downgrading the technology sector on Monday because of crowded positioning and a demanding earnings bar, also say a reset in tech could support a rotation into other sectors and small caps. That view suggests the market’s concentration risk could ease without derailing the wider advance.
In our earlier coverage of investors bracing for a key week of U.S. earnings and inflation data, we noted that markets were positioning ahead of major banks kicking off third-quarter reporting. That update also highlighted how weakness in chipmakers was weighing on broader momentum even as expectations for strong S&P 500 profit growth supported sentiment, with upcoming CPI, PPI and retail sales data in focus for interest-rate expectations.
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