What's Behind The Record Collapse In Market Breadth, And What Happens Next

One week ago, Goldman cranked up the alert level on the record collapse in market breadth to 11 when, echoing a similar warning from JPM and SocGen, the bank's chief equity strategist David Kostin wrote that "the recent sharp decline in equity market breadth points to elevated risk of a drawdown." Looking at the recent performance of the GAMMAs (Google, Apple, Microsoft, Meta and Amazon), Kostin observed that the five mega-cap tech stocks have accounted for 89% of the S&P 500 YTD price return, and warned that market breadth has contracted to one standard deviation below average for the first time since 2020, noting that "sharp declines in market breadth can be a useful signal for near-term equity market returns."

The strategist then looked at historical precedent and found that following all 9 sharp market breadth declines of a similar magnitude since 1980, the S&P 500 has posted below-average subsequent returns and larger peak-to-trough drawdowns with the Median 6-month Drawdown to Trough return at -11%.