'Stock Market Has A Bad Breadth Problem Again,' Veteran Wall Street Investor Warns

The concept of “market breadth” has become a hot topic among investors and analysts as major stock indices climb higher without broad participation from most of their components.

This disparity has prompted notable Wall Street veteran investor Ed Yardeni to comment that “the stock market has a bad breadth problem again.”

In a note sent to Yardeni Research’s subscribers on Sunday, the expert explained that while the past saw this issue due to the outperformance of the Magnificent 7 stocks, recently, it appears to be narrowing to the “Magnificent One,” namely Nvidia Corp. NVDA. 

David Morrison, senior market analyst at Trade Nation, recently echoed these concerns, noting that the overall market performance is heavily concentrated in the stock prices of a few corporations. The five largest companies by market capitalization in the S&P 500 now account for nearly 30% of its value, with their size and outperformance driving valuations significantly higher than the rest of the constituents.

Risks If A Selloff

Technical analysts warn that this poor-breadth trend increases the risk of a market selloff, particularly in technology shares and semiconductor stocks, especially Nvidia.

As the S&P 500 Index, tracked by the SPDR S&P 500 ETF Trust SPY, reaches new highs, the percentage of its companies trading above their 200-day moving averages has been declining, indicating potential for a looming correction. While false positives have occurred before, the current market conditions are raising red flags.

While several Wall Street investment strategists are upgrading their year-end targets for the S&P 500, Yardeni Research keeps a year-end target of 5,400 points.

“We are neutral on the market’s near-term prospects, but remain bullish on the long-term trend,” Yardeni stated.

Chart: S&P 500 Hit Record Highs Despite Increasing Number of Components Falling Below 200-Day Average

Risks Ahead

Growing concerns over global and domestic political situations could impact market performance over the summer, according to Yardeni Research.

The escalating conflict between Israel and Hezbollah and the increasing partisan divide in the U.S. as the presidential election approaches are potential factors that could weigh on investor sentiment.

Two Bull/Bear Ratios tracked by Investor Intelligence and the American Association of Individual Investors remain relatively bullish, yet from a contrarian perspective, this could be a bearish signal, Yardeni warned.

Joe Feshbach, market consultant for Yardeni Research, highlighted that while AI-related stocks continue to soar, warning signs for the broader market persist, drawing parallels to the late 1990s internet stock boom and subsequent correction.

The market’s response to the upcoming Personal Consumption Expenditures (PCE) inflation rate for May will be crucial. If the report confirms that inflation continues to moderate, it could be bullish for stocks, unless crude oil prices concurrently surge due to higher geopolitical risks.

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Image generated using artificial intelligence via Midjourney.