Experts like David Rosenberg, Mike Wilson, and Solita Marcelli warn this could mean poor performance.Six months into 2023, theBut a closer look at the performance of the individual constituents of the index tells a different story than that of a market in recovery. Here are the numbers:
The S&P 500 equal-weighted index has vastly underperformed the market-cap weighted index. Year-to-date, the equal-weighted index is up only 1.3% compared to the S&P 500's 11.7%. In the equal-weighted index, all constituents make up the same portion of the index as opposed to larger market-cap stocks making up a larger percentage of the index. This makes it a better gauge of market breadth.
Here's David Rosenberg, the founder of Rosenberg Research and former chief North American economist at Bank of America Merrill Lynch, in a June 1 note to clients:"We have the leaders all of a sudden showing some signs of struggle at these nosebleed valuation levels and we know from experience that a choppy market in the context of weak breadth is not the combination that leads to bullish outcomes.
Mike Wilson, the CIO and chief US equity strategist at Morgan Stanley, contrasted the Q4 2022 rally to today's, saying that there were fundamental reasons to be bullish last year as China loosened pandemic restrictions, but that things are different now. As noted above, there are different ways to measure market breadth. In a recent note, Bank of America's top US equity strategist Savita Subramanian looked at years when the top 50 stocks in the S&P 500 by market cap outperformed the broader index, and what it meant for subsequent market performance. She found that in 73% of years following top-50 outperformance, the market actually posted positive returns, leading her to push back on the notion that market breadth impacts performance.
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