The recent record high for the S&P 500 in July reveals a concerning disparity within the index, unseen since the early 2000s. Interestingly, this situation is not linked to Trump’s trade policies.
The S&P 500 reaches new heights, but many stocks are left behind
On another note, the SPDR S&P 500 ETF Trust, or SPY, has soared to levels that outweigh its counterparts. In contrast, the Invesco S&P 500 Equal Weight ETF, RSP, tells a different story.
The ratio between SPY and RSP has climbed to its highest point since August 2003, indicating the tightest market breadth in over 20 years.
Clearly, a small number of large-cap stocks are driving the gains, while most average stocks are lagging. The median S&P 500 component is currently down 11% from its 52-week peak, and RSP is down 3% from its mid-2024 high, despite the cap-weighted index hitting record numbers.
Market breadth reflects the number of shares actively participating in a rally. Right now, it’s at an unusually low level, prompting investor concerns. This isn’t necessarily a sign that the bull run is over, but rather that profits are concentrated among a select few high-performing stocks.
What does market breadth mean?
According to analysts from Goldman Sachs, particularly David J. Kostin, narrow market breadth could lead to moments of change in the short term.
“If our forecasts for economic and revenue growth hold true, we could see greater activity in the market,” Kostin noted.
Historical data from Goldman indicates that stocks often catch up during strong economic rebounds.
There are also noteworthy valuation aspects to consider. Stocks with robust profit margins and healthy balance sheets are currently valued much higher, while so-called “low quality” stocks are trading at discounts. If macro conditions improve—such as lower interest rates and reduced trade tensions—there’s potential for a shift toward those underperforming stocks.
Nonetheless, Kostin remains guarded. “I think investors should prepare for stronger economic growth and a more favorable interest rate outlook than what’s currently anticipated, as ‘low quality’ stocks may outperform over the longer term,” he added.
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