When it comes to the direction of the market, pardon the "market", only 5 companies matter.
That is the opinion of Goldman's chief strategist David Kostin, who observes that just "five firms – AMZN, GOOGL, MSFT, FB, and GE – totaling 9% of the equity cap of the index have accounted for more than 100% of the S&P 500 YTD return. Stated alternatively, without these stocks the index would have posted a 220 bp lower total return or -2.2% YTD."
As a reminder, over the weekend we pointed out that having noticed the dramatic collapse in the Advance-Decline line, Goldman's own estimation of market breadth just dropped to a never before seen low.
Our Breadth index currently equals 1, one of the lowest levels in the 30-year series. The Breadth index has stayed below 5 for at least two consecutive months just 11 times since 1985. The typical episode lasted four months, with past episodes ranging from two months in 2007 to a high of 14 months during the tech bubble. The current exceptionally narrow breadth period is just one month old but is on track for a second month, so this environment could reasonably be expected to persist into early 2016.
Goldman then explains why its clients are nervous:
Clients continue to point to similarities between the current narrow breadth environment and that of the later years of the tech bubble. S&P 500 forward P/E currently equals 16.3x, near the highest level since the tech bubble. Mega-cap growth stocks explain a vast majority of the trailing 6- and 12-month S&P 500 return. Other similarities to the late 1990s provide a persuasive case for why mega cap outperformance will likely persist, at least in the near term. Modest US economic growth and peak margins should put a premium on stocks with perceived high secular growth prospects.
Sure... or just keep buying these five stocks, which as even Goldman admits are all that matters to the market. Because if this record low breadth fails to prop up the S&P, then all other stocks will likewise tumble. So may as well do what all the other "smart money" is doing and herd in just these five stocks...
... just don't be surprised when the dug is pulled out from under you: at a valution over 20x EBITDA, the top 5 companies are overvalued by precisely 100% compared to the rest of the S&P500.