Despite ongoing cautionary signals from market breadth indicators, U.S. stock gains persist. The Nasdaq is poised to achieve its best two-month performance since 2004, a situation characterized by "poor breadth" that has left Wall Street strategists both puzzled and watchful.
According to Dow Jones Market Data, the Nasdaq is approaching its most robust two-month advance since November 2002. Concurrently, the S&P 500 is heading toward its best two-month showing since May 2020. Just this Thursday, all three major indices closed at record highs, buoyed by a rebound in software stocks.
However, beneath the impressive index levels lies a significant market divide. Ben Snider, Goldman Sachs' chief U.S. equity strategist, notes that excluding a handful of mega-cap tech stocks, the median stock in the index remains about 13% below its own peak, representing one of the widest disparities in the past 25 years. More concerningly, in four of the S&P 500's last five record closes, the number of declining stocks outnumbered those advancing.
This phenomenon, known as "poor breadth," occurs when an index hits new highs while most individual stocks do not participate. Data from Bank of America shows that in April, only 23% of S&P 500 constituents outperformed the index, marking the fourth-lowest reading in the bank's records dating back to 1986. Jonathan Krinsky, chief market technician at BTIG, warns that the current narrowness of the rally rivals that seen during the late-1999 and early-2000 dot-com bubble era.
Yet, unlike the dot-com era, today's leading technology giants are supported by robust earnings. Snider suggests the concentrated gains reflect similarly concentrated earnings expectations in semiconductors, technology, and communication services. The key question for the market now is whether the thousands of lagging stocks will catch up or if the few leading stocks will decline to close the gap. The answer may become clearer in the coming weeks.
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