The headline number looks healthy. The S&P 500 has returned about 14% this year and sits roughly 1% below its August record. Underneath, according to Goldman Sachs, the picture is much weaker.
In a note to clients on Monday, the bank said strength in artificial-intelligence stocks has kept the index steady, but that market breadth, a measure of how many stocks are taking part in the market’s moves, has fallen to its lowest level since the dot-com bubble.
A tale of two markets
The bank’s strategists, led by Ben Snider, pointed to a striking gap. While the index is close to its high, the median S&P 500 stock trades about 16% below its own 52-week peak. In other words, the typical company in the index is in a correction, and only a small group of very large companies is holding up the average.
Other measures tell a similar story. Fewer than half of the index’s constituents are trading above their 200-day moving averages. Media reports of Goldman analysis also note that the number of stocks hitting 52-week lows has exceeded those hitting new highs for nine consecutive sessions, a combination that has been rare while the index sits near a record.
Goldman’s own gauge subtracts the median stock’s distance from its high from the index’s distance from its high. That gauge is now at a level not seen since the bubble years around 2000.
Valuations have cooled, not soared
The note also contained reassurance. Despite the rally, the S&P 500’s forward price-to-earnings ratio has fallen from about 22 times to about 19 times, in line with its 10-year average. Goldman said rising interest rates are one reason for the compression, and estimated that the current multiple sits about 10% below the level suggested by its model of rates, inflation and profitability.
That model implies the market is not priced for perfection, even if its leadership is unusually narrow. The strategists do not read the discount as a sign that investors expect earnings to collapse.
Investors are cautious
Investor positioning appears light. Goldman’s US equity positioning indicator has fallen back to around the level recorded at the market’s low in March this year. A separate view from the bank’s technology trading desk described the mood as reserved optimism mixed with angst and fatigue, even as the biggest technology names grind higher.
That combination of cautious positioning and depressed valuations underpins the bank’s constructive case. If macroeconomic uncertainty eases, Goldman argues, the broader market has room to rise, and stocks that have lagged could stage a catch-up rally.
The historical warning
Narrow markets do not always end badly, but they tend to be jumpier. Goldman noted that sharply narrowing breadth has historically been associated with drawdown risk, and that momentum strategies can become volatile as leadership rotates.
Analysts who study past episodes point to a mixed record. A 1998 reading, which came after a sharp pullback, did not mark the top of the market. Readings from late 1999 and early 2000, by contrast, arrived just before the dot-com peak. The difference lay in what happened next: how quickly the economy, interest rates and earnings changed direction.
Why this week is a test
Monday’s trading showed how fragile sentiment can be. The S&P 500 fell 0.77%, its largest daily drop since 20 August, as Treasury yields climbed to their highest since 2007 and oil rose. The 10-year yield near 5.2% and market bets on another Federal Reserve rate increase in October are the kinds of macro pressures that Goldman says need to ease for a broader rally to develop.
Technology giants have not been immune. Meta and Tesla fell sharply on Monday, while Nvidia rose after announcing a record share-buyback authorisation. That divergence, with some big names rising as others fall, is a reminder that even the leadership group is not moving in lockstep.
What investors can take from it
Goldman’s advice was to focus on stocks where investors hold differentiated views on long-term growth. It also said the value-oriented long/short strategy that has returned more than 25% since the middle of last year is likely to do less well from here.
For individual investors, the takeaway is not necessarily to sell. It is to check how much of a portfolio depends on a small number of large stocks, and whether index funds that track the S&P 500 give more concentrated exposure than expected. Investors with specific questions should speak to a licensed financial adviser. This article is for information only and is not investment advice.
