As major stock indexes rise without broad participation from most of their constituents, the concept of “market breadth” has become a hot topic among investors and analysts.
The disparity is due to the fact that a well-known veteran Wall Street investor Ed Yardeni “The stock market is again in serious trouble,” he said.
In a note sent to Yardeni Research subscribers on Sunday, the expert said that in the past, this issue was seen due to the strong performance of the Magnificent Seven stocks, but more recently, the Magnificent One, viz. NVIDIA Corporation. NVDA.
| The Magnificent 7 | Year-to-date change |
|---|---|
| NVIDIA Corporation | 162.8% |
| Meta Platforms, Inc. Meta | 42.9% |
| Alphabet Inc. Google Google | 30% |
| Amazon. Amazon | 26.1% |
| Microsoft MSFT | 21.3% |
| Apple. AAPL | 11.8% |
| Tesla Inc. TSLA | -26.3% |
David MorrisonTrade Nation senior market analyst David L. Schneider recently echoed these concerns, noting that the overall market performance is heavily concentrated in the stock prices of a small number of companies. The top five companies in the S&P 500 Index by market capitalization currently account for nearly 30% of the index, and their size and superior performance have led to significantly higher valuations than the rest of the index.
Risk of selling pressure
Technical analysts have warned that the narrow band increases the risk of a sell-off in technology and semiconductor stocks, especially Nvidia.
The S&P 500 index is SPDR S&P 500 ETF Trust spyis reaching new highs, but the percentage of companies trading above their 200-day moving average is declining, suggesting a correction may be looming. While false positives have occurred before, the current market conditions raise red flags.
While several Wall Street investment strategists are raising their year-end targets for the S&P 500, Yardeni Research is keeping its year-end target at 5,400 points.
“We are neutral on the short-term outlook for the market but remain bullish on the longer-term trend,” Yardeni said.
Chart: S&P 500 hits record high despite growing number of constituents below 200-day average
Future risks
According to Yardeni Research, growing concerns over the global and domestic political situation may influence market trends over the summer.
The escalating conflict between Israel and Hezbollah and growing partisan divisions in the United States as the presidential election approaches could weigh on investor sentiment.
Two bull/bear ratios tracked by Investor Intelligence and the American Association of Individual Investors remain relatively bullish, but Yardeni warned that they could be a bearish signal from a contrarian perspective.
Joe FeshbachThe market consultant at Yardeni Research said that while AI stocks continue to soar, warning signs for the broader market remain, drawing parallels with the internet stock boom and subsequent correction of the late 1990s.
The market’s reaction to the personal consumption expenditures (PCE) inflation report due in May will be crucial. If the report confirms that inflation remains moderate, this could be bullish for equities, unless rising geopolitical risks lead to a simultaneous surge in oil prices.
Read next:
Despite leading the AI revolution and having a market capitalization of over $3 trillion, Nvidia’s brand recognition lags behind Apple and Microsoft.
Image generated using artificial intelligence via Midjourney.
