S&P 500 Rally Fails to Broaden as Fewer Stocks Make New Highs

The S&P 500 rally is leaving many stocks behind, with few companies making new highs. The index's recent gains are largely driven by a cluster of massive technology companies. The number of companies making new highs outpaced those making new lows by only 88, an analysis by Oppenheimer & Co. showed. This narrow breadth has been a harbinger of poor performance, with below-average returns for the index over the next 12 months. Broader participation is important for sustained rallies.

The S&P 500's recent rally has been notable, but it has left many stocks behind. According to an analysis by Oppenheimer & Co., only 88 companies have made new highs compared to those that have made new lows. This narrow breadth has been a harbinger of poor performance, with below-average returns for the index over the next 12 months. Broader participation is crucial for sustained rallies.

The index's gains are largely driven by a cluster of massive technology companies. Apple Inc., Alphabet Inc., and Tesla Inc., collectively known as the "Magnificent Seven," have been significant drags on the market. Apple's shares have dropped 16% this year amid tariff concerns and AI service development problems. Alphabet Inc. has seen a 7% decline due to fears that AI chatbots will impact its lucrative Google search business. Tesla Inc. has faced a 23% drop due to slumping electric vehicle sales [1].

These three stocks have been a more than 120 point drag on the market-capitalization weighted S&P 500. If they were to at least erase their losses for 2025, the benchmark would be about two percentage points higher. However, the rally is broadening, but the Magnificent Seven make up such a massive proportion of the overall market that if they stall, by definition, the market will struggle [1].

Paul Stanley, chief investment officer at Granite Bay Wealth Management, stated, "The rally is broadening, but the Mag 7 make up such a massive proportion of the overall market that if they stall, by definition, the market will struggle" [1]. While Microsoft Corp., Nvidia Corp., and Meta Platforms Inc. have been responsible for roughly half of the S&P 500’s gains this year, Netflix Inc., Broadcom Inc., and Palantir Technologies Inc. have also been big contributors. However, Amazon.com Inc., another Magnificent Seven stock, has seen its shares remain roughly flat in 2025 [1].

The narrow breadth of the S&P 500's rally is a cause for concern. A broader rally would indicate that more sectors and companies are participating in the market's growth. This broader participation is crucial for sustained rallies and to avoid a potential correction. As the market continues to navigate the complexities of tariffs and trade deals, investors should remain vigilant and monitor the performance of key sectors and companies.

References:
[1] https://financialpost.com/investing/apple-alphabet-and-tesla-are-holding-back-the-sp-500-rally