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It’s NOT Just a Few Stocks that are Going Up

The cry(ing) I’ve been hearing from stock market bears over the last few months is that “it’s only a few stocks that are driving ALL the returns!” They’ve even coined terms like FAANG stocks, FANMAG, or most recently Magnificent 7. The term market breadth refers to the number of stocks that are positive or driving the market up. So, let’s look at a few charts to see if this is true, or just a lot of hot air from market participants that might have missed 2023’s stellar returns. The charts will show different variations of the US stock market and how far they are from their all-time highs on January 3, 2022.

First, let’s look at the S&P 500.

Only 2.34% off its all-time high. Not bad! Naysayers will say the recovery is driven by the Magnificent 7, but let’s narrow this down a bit and look at the S&P 500 vs. the Top 50 stocks in the index. If it’s being driven by only the largest stocks, then the Top 50 should have already made a new high… right?

Nope. In fact, the Top 50 are trailing the broader S&P 500 by 0.10%. Hmmm, interesting. 

What if we took away the market cap weighting of the S&P 500 and equally weighted every stock? Meaning every stock in the index would have a 0.2% weighting instead of being driven by just the largest stocks in the index. It should be WAY behind the S&P 500 if the market is only being driven by a few stocks… right?

Wrong. It trails the market cap-weighted S&P 500 by less than 1%. 

Now, let’s go down the market cap spectrum and see how mid- and small-cap stocks are doing.

Finally, we see a little crack. Small-caps have definitely lagged, and that is mostly driven by the bank failures that occurred earlier this year; many small regional banks are included in the small-cap index. Looking at mid-cap stocks, they are right behind the S&P 500.

So, if you hear anything about “poor market breadth” or the market is only being driven by “a handful of stocks,” just know that person either hasn’t reviewed the facts and/or is just repeating what they are hearing. 2023 has been a very nice rally and a healthy one at that.

~ Steve Gormley 

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested directly. 

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.