While the breadth of this cyclical bull market is adequate in absolute terms, there is no question that on a relative basis the leadership remains quite narrow. As of June, only 28% of the stocks in the S&P 500 are outperforming the benchmark. We have gone from the Nifty 50 to the Mag 7 to now just one or two stocks that are driving the price action.
It’s a vicious cycle, with these mega caps pushing the index so much higher that it becomes nearly impossible for the rest of the market to outperform. Think of the 1000 bps spread this year between the SPX and SPW, and how high the hurdle is for the rest of the market to outperform. That’s why the relative breath numbers are so much worse than the absolute numbers. The more I think of this dynamic, the more convinced I am that the relative broadening is more likely to happen in a down market.
As real and promising as the AI boom is, the performance of just a few multi-trillion dollar stocks raises my eyebrows. It makes you wonder how this will play out in the coming year or two, and if these stocks could become overcrowded and overvalued. I am in no way questioning the fundamentals of these market leaders, but it’s always good to keep an eye on market history when the extremes get this large. The performance of NVDA is now on par with that of RCA a century ago.