- Wall Street’s “bad breadth problem”: Principal Financial Group points out that the rally in the S&P 500 this year has been driven by only a few companies in specific sectors. The market’s performance heavily relies on a select few stocks, which could pose a risk if they fail to meet earnings expectations.
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Concentration of stock performance: Until mid-June, the top five best-performing stocks in the S&P 500 contributed 60% to the index’s returns, a significant increase compared to the average of 35% over the past decade. This concentration of performance highlights the dominance of a few mega-cap companies, such as NVIDIA, Apple, and Microsoft.
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Market-weighted outperforming equal-weighted: The market-weighted S&P 500 is outperforming the equal-weighted S&P 500 by 11%, the largest year-to-date outperformance since 1990. This divergence indicates that the performance of a few large-cap stocks is having a more significant impact on the overall index compared to smaller-cap stocks.
Supplemental Information ℹ️
The article emphasizes the concentration of stock performance in the S&P 500, with a handful of mega-cap companies driving the market’s gains. It raises concerns about the potential vulnerability of the broader market if these stocks fail to meet the high earnings expectations placed upon them. The market-weighted S&P 500’s outperformance compared to the equal-weighted version further underscores the dominance of these large-cap stocks.
ELI35 💁
A financial group warns that the S&P 500’s recent success is reliant on just a few powerful companies, which could be problematic if they don’t meet profit expectations. The top-performing stocks have contributed more than usual to the index’s gains, making it a “bad breadth problem.” This means the stock market’s performance hinges on a small group of influential stocks, potentially leaving the broader market vulnerable.