As the S&P 500 continues its impressive streak of record-breaking gains, a concerning trend is surfacing within the index that hints at potentially turbulent times ahead.
Recent data from financial news aggregator Zerohedge, shared in a post on July 3, reveals that the breadth of the S&P 500’s rally is faltering. Zerohedge highlighted that the index’s equally weighted benchmark relative ratio has plummeted to its lowest level since the 2008 financial crisis. Such lopsidedness hasn’t been seen since the collapse of Lehman Brothers, a harbinger of the global financial meltdown.
Historically, peaks in the equally weighted benchmark relative ratio occurred notably around 2014-2015 and again in 2018-2019, each followed by sharp declines, particularly during the onset of the COVID-19 pandemic in 2020.
Despite a brief recovery in 2020-2021, the ratio has since been on a persistent downward trajectory, hitting new lows in 2023 and 2024. This indicates a narrowing of the market rally, where gains are increasingly concentrated in a select few stocks rather than being broadly distributed across the index.
As of July 1, 2024, the ratio stood at approximately 1.2, significantly lower than its peak of around 1.55 observed in 2014.
The implications of such lopsidedness in the S&P 500 are profound. It suggests that only a handful of stocks are driving the index’s performance, leaving the majority trailing. This concentration poses risks to market stability, as sharp corrections can occur if the leading stocks stumble.
Recent months have seen the index’s rally predominantly led by technology stocks venturing into artificial intelligence, notably spearheaded by Nvidia (NASDAQ: NVDA). Analysts have cautioned about the potential for a market crash in the near future, citing warning signs such as the lack of breadth and a slowdown in momentum.
For instance, Piper Sandler, a major banking entity, warned of a possible 10% correction for the S&P 500 in the summer of 2024. This cautionary note underscores concerns about the index’s vulnerability due to its current structure.
Similarly, parallels have been drawn between the current performance of the S&P 500 and previous periods of economic turmoil. A report from Finbold on June 16 highlighted that only 30% of S&P 500 stocks have outperformed the index year-to-date, reminiscent of the conditions observed during the 2000 Dot-com bubble.
Meanwhile, despite these underlying concerns, the S&P 500 reached a historic peak, concluding its latest trading session at 5,537 points.
Disclaimer: The information presented here should not be construed as investment advice. Investing carries risks, and individuals should exercise caution when making financial decisions.
