The S&P Is Soaring, But Two-Thirds of Stocks Are Stalling

By Peter C. Earle, American Institute For Economic Research

US equity investors have a lot to cheer of late, despite stubborn inflation, rising interest rates and financial tightening, and falling consumer confidence. The S&P 500 has hit 28 closing highs this year, and the index is up 103 percent since the start of 2023 — slightly more than doubling even excluding dividends. While one would be foolish to predict that a stock market correction or crash is necessarily imminent, record levels in a given stock index can be misleading.

Indices can be structured in ways that create the outward appearance of market health despite lackluster performance, and even sagging fortunes, beneath the index value. In early October, only an estimated 25 percent of stocks making up the S&P 500 were trading above their 50-day moving average. By the end of Monday, October 12, that number had fallen to 21 percent.

Per Bloomberg analysis, over the past three months, the ten largest S&P 500 stocks have gained 7.06 percent; the entire equal-weight S&P 500 index has lost 1.49 percent. That is an outperformance of 8.55 percentage points, putting the current reading among the most extreme episodes of megacap leadership in Bloomberg’s historical records.

An index can rise even when many, even most, of the stocks within it are declining in price. In a capitalization-weighted index (see holdings, here), bigger companies account for more weight. An equal-weighted index, on the other hand, gives each stock the same weight (as shown here) regardless of size. The S&P 500 index customarily reported in the financial news media uses a capitalization weighting based on the shares available for public trading and the stock price. A company with a float-adjusted market value of $2 trillion in an index totaling $50 trillion would therefore have a 4 percent weight. In an equal-weighted index with 500 constituents, that same company would have a 0.2 percent weight — as would each of the other 499.

The number of stocks rising versus falling in a particular index is known as the market “breadth;” tracking that number helps distinguish a broad advance in stock prices from one carried by a small number of companies. In a capitalization-weighted index, narrow breadth can easily lead market conditions to appear healthier than they are...(READ THIS FULL ARTICLE 100% FREE HERE).