Despite the apparent upward trend in the stock market, a worrisome pattern is emerging that could spell trouble for the sector, indicating uncertainty ahead.
Recent data shared on June 16 by the capital markets commentary platform, The Kobeissi Letter, has revealed an alarming similarity between the current state of the S&P 500 and the 2000 Dot-com bubble.
The data shows that only 30% of S&P 500 stocks have outperformed the index year-to-date, a slight improvement from the 29% recorded in 2023. This marks another year of unusually low market breadth.
Looking back at historical data from 1990 to June 2024, it becomes evident how significant this trend is. Typically, the median percentage of S&P 500 stocks outperforming the index is 49%, indicating broad market participation.
Lessons from the Dot-com bubble can be drawn, as the back-to-back years of underperformance in 2023 and 2024 resemble a similar pattern observed during the 2000 Dot-com bubble. These years stand out for their lower percentages of outperforming stocks, reminiscent of a market characterized by narrow leadership and heightened volatility.
This concerning trend is amplified by the fact that the S&P 500 has surged 12% year-to-date, mainly driven by a select few tech giants. This concentration raises doubts about the sustainability of the rally and mirrors the conditions that led to the Dot-com crash.
While the index is on the rise, the gains are not evenly spread across the market, increasing the risk of volatility should these leading stocks face setbacks.
Tech stocks, particularly those involved in artificial intelligence (AI), have dominated the recent rally in the S&P 500. Companies like Nvidia and Apple have seen significant market cap growth, with both vying for a top spot in the global market.
Overall, the reliance on a few key companies poses significant risks as the index’s performance hinges heavily on them. The uncertainty surrounding the AI stock bubble adds another layer of concern to the situation.
