What low stock market breadth means for the future of the S&P 500

Anyone who’s done a group project in school knows the usual dynamic: A couple of overachievers drive the bus, while other, more passive team members hitch a ride. Everyone gets the same grade. The division of labor is unspoken and largely accepted.

A similar dynamic has played out in the stock market in recent years. In this analogy, the Magnificent 7 are the overachievers. And while stock returns were starting to broaden to other sectors before the Iran war, the market’s recent V-shaped jag has restored the market to default settings.

The chart below shows this breadth reduction in action. Since the start of the Iran war, the S&P 500 has outperformed its equal-weighted counterpart, and the Mag 7 has blown away both of them.

But don’t just take my word for it. New data from Goldman Sachs finds that S&P 500 breadth is at its lowest level since mid-2023. Some additional stats that show how narrow the stock market’s rally off lows has been:

• The information technology and communication services sectors in the S&P 500 have accounted for 70% of the index’s gains off the March 30 low
• 85% of the S&P 500’s upward earnings revisions — which have contributed to much of that bullishness — have been concentrated in just 4 chipmaker and energy stocks: Micron, Exxon Mobil, Chevron, and Broadcom

This information can be sliced in two different ways, depending on your personal sentiment:

1. If you’re more bullish, you can make the argument that a lack of breadth leaves upside for other areas of the market to catch up. One area to watch is energy, which is revising earnings higher, but — because of recent volatility — is still in the red for the war.
2. If you’re more bearishly inclined, you might point out that concentration risk leaves a top-heavy market vulnerable to sudden pullbacks. The harder something goes up, the harder it falls, etc.

JPMorgan strategists are taking a decidedly glass-half-full view of the current environment, citing rising profit projections as a main driver of their equity outlook. The firm expects especially strong performance this earnings season from semiconductor, mining, and industrial stocks.

But as fun as earnings are to forecast, we’re about to get a large batch of results and forward outlooks from the companies themselves. In terms of the Mag 7, Tesla is on Wednesday, while Alphabet, Microsoft, Amazon, and Apple report over a two-day period next week.

For this class project, they are the valedictorians. And the way they go is where the market will go.