Market Performance Remains a Tale of Haves and Have-Nots

Adam Turnquist | Chief Technical Strategist

Last Updated: July 11, 2024

The S&P 500 strung together 37 record highs this year aboard an 18.1% rally, as of July 10. The advance has largely been powered by a handful of mega cap names tied to technology and/or artificial intelligence. In fact, six stocks — NVIDIA (NVDA), Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Meta (META), and Alphabet (GOOG/L) — are responsible for nearly two-thirds of the S&P 500’s total return this year. As highlighted in the chart below, the Magnificent Seven, which adds Tesla (TSLA) to the aforementioned six stocks, is up 51% on an equal weight basis. Without these seven stocks, the S&P 493 (ex Magnificent Seven) would only be up 8.3%.

For the rest of the market, performance has been positive but not nearly as exciting. The average stock, proxied by the equal weight S&P 500, is up only 4.6% this year, underperforming the cap-weighted S&P 500 by 13.5%, marking the largest delta since 1998.

Returns Remain Bifurcated Between Mega Caps and the Average S&P 500 Stock

Source: LPL Research, Bloomberg 07/10/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Limited participation in the latest leg higher for the broader market has created notable divergences between price and a long list of breadth metrics. Divergences can often be temporary and do not imply the bull market run is over. However, they do serve as a warning sign for a potentially weakening rally and trend reversal. One of the many ways to measure the internal strength of the market is to analyze how many stocks within an index are actually outperforming, along with what sectors are leading or lagging.

The table below highlights how many stocks within the S&P 500 are beating the index this year, also broken down by sector. At a high level, fewer than 25% of S&P 500 stocks are outperforming this year. Technology has dominated at the sector level, but only half of the stocks are beating the tape. While tech sector leadership is welcomed, the lack of other cyclical stocks outperforming is a concern, although notable underperformance in consumer staples, real estate, and utilities helps alleviate concerns over a shift toward defensive leadership.

Very Few S&P 500 Stocks are Outperforming This Year

Source: LPL Research, Bloomberg 07/11/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Summary

The S&P 500 remains in a bull market and above its longer-term uptrend. However, overbought conditions paired with overhead resistance and diverging breadth point to growing risk for a pullback over the near term. The dwindling list of new highs among S&P 500 constituents, a diverging advance-decline line, underwhelming volume, and extremely overbought conditions in technology and semiconductors add to the evidence this rally could be due for a breather. This does not denote a shift in our confidence in the longer-term bull market, and as a reminder, a 10% drawdown during the second half would align with historical trends for the S&P 500. Based on this backdrop, we recommend a neutral equities allocation and tactically buying dips over chasing the latest rally.

Important Disclosures

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

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Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

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Adam Turnquist

Adam Turnquist oversees the management and development of technical research at LPL Financial. His investment career spans over 15 years.