September saw a stark divergence in the stock market, with 75% of S&P 500 companies experiencing declines, despite the index remaining near its all-time high. This indicates a significant narrowing of market leadership, as investor capital increasingly flows into a few mega-cap tech stocks like Apple and Microsoft.
Analysts suggest this trend is a defensive move, with investors shifting away from higher-beta stocks. Morgan Stanley noted a sharp drop in stocks trading above their 200-day moving average, signaling underlying weakness not reflected in the broader index performance.
September Sell-Off: 75% of S&P 500 Stocks Tumble as Market Breadth Narrows
While the S&P 500 hovers just below its August all-time high, the underlying market picture for September was far less rosy. A staggering three-quarters of the stocks within the benchmark index experienced declines, exposing a significant narrowing of market leadership. This trend indicates that investors are increasingly concentrating their capital in a select group of the largest and most dominant companies, leaving the majority of the market behind.
Gains in tech giants such as Apple, Nvidia, Alphabet, Microsoft, and Meta Platforms have artfully masked the widespread weakness seen across a broader swath of the market. Chris Toomey, a managing director at Morgan Stanley's private wealth management, observed on CNBC's "Closing Bell" that market breadth is contracting, with investors flocking towards "higher quality names that are a larger part of the index." This defensive posture suggests a shift away from higher-beta stocks that previously propelled market gains.
Despite this concentration, Toomey noted that the median S&P 500 stock is still demonstrating robust earnings growth, exceeding 15%. However, investors are actively de-risking by exiting positions in other, less prominent companies.
A recent report from Morgan Stanley analysts highlighted this phenomenon, revealing that the percentage of S&P 500 stocks trading above their 200-day moving average has plummeted from approximately 75% during the summer to just 49%. Strategists led by Michael Wilson suggested that this divergence between the index's performance and market breadth is unsustainable and will likely be reconciled, especially if bond market volatility does not subside. Their advice for investors is to "Stick with large cap quality and add to riskier stocks in October."
The shift in market sentiment appears to be linked to a change in expectations for Federal Reserve policy. Breadth had been improving through the summer, even with rising oil prices and bond yields. However, a reversal occurred after Federal Reserve Chair Kevin Warsh's address at Jackson Hole in late August, prompting markets to price in a more hawkish central bank stance.
Market breadth has narrowed significantly in September, with major tech stocks masking weakness elsewhere.
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