Bad Breadth

The first three months of trading in 2023 have been a tale of the haves and the have-nots. The S&P 500 is up 7% this year, but the average stock is up barely 1%. Narrow leadership tends to signify a shakier rally than one with a broader group of stocks participating.

The market capitalization-weighted index’s overall rise is thanks to a handful of megacap companies at the very top: The 20 largest companies in the S&P 500 have added nearly $2 trillion in market cap this year, versus $170 billion for the remaining 480 stocks, notes Torsten Slok, chief economist at Apollo Global Management.

That’s a combination of both big starting market values and big increases in price. Apple has climbed 26% this year, to a market-cap of $2.6 trillion. That has contributed 1.6% to the S&P 500 alone, according to Goldman Sachs data. Microsoft's 19% rise and Nvidia’s 83% surge have each added more than 1%.

Those megacap stocks’ influences on the index dwarf the impact of the biggest losers this year. Charles Schwab, down 37%, has subtracted just 0.15% from the S&P 500. First Republic Bank is down 88% in 2023—weighing on the index by just 0.08%. Pfizer, down 20%, has cost the S&P 500 just 0.18% this year.

“Our view is that megacap tech has been a beneficiary of the selling in other sectors, but ultimately once that rotation was done, the indexes would be quite vulnerable,” Jonathan Krinsky, chief market technician at BTIG, wrote today. “This dispersion is something that often occurs in the latter innings of market rallies.”

There’s less room for error—should the winds shift and Apple, Microsoft, and a handful of other stocks stumble, the S&P 500 is vulnerable too. It’s also a tougher environment for stock pickers, with fewer winners to choose from.

The 2023 rally remains anchored by the biggest stocks at the top of the market—a phenomenon that can’t last forever. Investors will need to continue to see broader participation to gain greater confidence in the rally.