The S&P 500 Index is up double digits this year. But the rally has been marked by narrow leadership. And, interestingly, current buying behavior mirrors this trend.
It seems like nobody cares that only a few stocks are driving the gains. But everyone should — because narrow leadership doesn’t bode well for the sustainability of the current rally. A foundation built on just a few pillars can easily give way if one pillar weakens.
So how can investors strengthen their portfolios? Digging into current market leadership can provide some direction.
The S&P 500 Index is up 12% so far this year.1 But only a quarter of the underlying stocks are up more than that and actually beating the market.2 And roughly half of S&P 500 firms don’t have any gains at all.3
For comparison, over the past decade, 52% of S&P 500 stocks, on average, have outperformed the index4 and 70% of stocks, on average, registered gains.5
With the market cap weighted S&P 500 Index outperforming its equal-weighted counterpart by 9.2% — outperformance that on a trailing three-month basis sits in the 99th percentile — it’s clear that large mega-cap stocks are driving the gains.
In fact so far this year, the S&P 500’s top five largest stocks are contributing more to returns than in any other year in the past two decades.6
Sector leadership is also limited. Only Communication Services, Information Technology, and Consumer Discretionary are outperforming the S&P 500 year to date and over the past three months.
Typically, at least six sectors outperform the market, on average, on a rolling three-month basis. This current low level of sector leadership has persisted for the past three months, as shown in the following chart.
Beneath the surface, less than 50% of the stocks are beating their sector’s average return in those market leading sectors. Additionally, the average stock return in those three sectors is far greater than the median sector stock return, as shown below. Of course, the average being greater than the median indicates a large number of positive outliers. So, even in the top-performing sectors, just a small number of firms are driving returns.
Right now, the S&P 500 Index is trading above its 50-day and 200-day-moving average. But only 54% and 58% of underlying stocks are trading above those averages.7
Looking at the magnitude in which stocks are trading above their technical averages, the S&P 500 is trading 3.9% above its 50-day moving average, while only 30% of underlying stocks are trading more than 3.9% above their own 50-day moving averages.
The same is true for the 200-day moving average. The S&P 500 is up 8.5%, but only 27% of the underlying stocks are up more than 8.5% to their own 200-day moving average, as shown below. And while the S&P 500’s 50-day moving average is 4% above its 200-day moving average (a technical crossover momentum comparison), just 33% of stocks have the same or greater upward momentum.
Narrow leadership suggests the rally in US equities is unsustainable. Not only have these narrow gains pushed up broad-based valuations, as the S&P 500 Index’s Price-to-Next-12-Month Earnings Ratio (NTM P/E) is firmly above its historical median (19.1 versus 17.9), they also run counter to earnings trends.8 S&P 500 firms reported negative earnings growth in the first quarter and are expected to do so again in Q2, for what would be the third consecutive quarter.9
So how should investors position for the market’s narrow leadership? Rotate overseas where the +10% gains by non-US stocks are likely more sustainable.10 Unlike the US where only 56% of stocks have positive returns in 2023, 76% of developed ex-US firms have gains.11 Further illustrating stronger underlying support, 49% of non-US stocks are beating the broader benchmark, almost double the rate of US stocks.12
Developed ex-US stocks also aren’t plagued with rich valuations or weak earnings sentiment. In fact, the NTM P/E for non- US equities is 12% below its historical average.13 And led by European equities, positive earnings growth is expected next quarter — just as it was this past quarter.14
For more insight into current market trends, check out our full Chart Pack.
1 Bloomberg Finance, L.P. as of June 8, 2023
2 Bloomberg Finance, L.P. as of June 8, 2023 based on the S&P 500 Index
3 Bloomberg Finance, L.P. as of June 8, 2023 based on the S&P 500 Index
4 Bloomberg Finance, L.P. as of June 8, 2023 based on the S&P 500 Index
5 Bloomberg Finance, L.P. as of June 8, 2023 based on the S&P 500 Index
6 Barclays US Equity Strategy, June 8, 2023
7 Bloomberg Finance, L.P. as of June 8, 2023 based on the S&P 500 Index
8 Bloomberg Finance, L.P. as of June 8, 2023 based on the MSCI EAFE Index
9 FactSet as of May 31, 2023
10 Bloomberg Finance, L.P. as of June 8, 2023 based on the MSCI EAFE Index
11 Bloomberg Finance, L.P. as of June 8, 2023 based on the MSCI EAFE Index
12 Bloomberg Finance, L.P. as of June 8, 2023 based on the MSCI EAFE Index
13 Bloomberg Finance, L.P. as of June 8, 2023 based on the MSCI EAFE Index
14 Bloomberg Finance, L.P. as of June 8, 2023 based on the MSCI Europe Index
S&P 500 Index
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
MSCI EAFE Index covers DM countries in Europe, Australasia, Israel, and the Far East
S&P 500 Equal Weighted Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance.
The views expressed in this material are the views of the SPDR Research and Strategy team through the period ended June 9 2023, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
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Unless otherwise noted, all data and statistical information were obtained from Bloomberg Finance, L.P. and SSGA as of June 9, 2023. Data in tables have been rounded to whole numbers, except for percentages, which have been rounded to the nearest tenth of a percent.
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