S&P 500 Divergence: A Narrow Market’s Tale of Two ETFs
The gap between the performance of the cap-weighted S&P 500, tracked by the SPDR S&P 500 ETF Trust (SPY), and its equal-weighted counterpart, the Invesco S&P 500 Equal Weight ETF (RSP), has dramatically widened in December, reaching over 4 percentage points. This significant divergence, the largest since May 2023, underscores how a small cluster of stocks is driving market returns, leaving the majority behind. A shockingly narrow market breadth, with only 90 out of 500 S&P 500 stocks showing positive returns month-to-date as of December 17th, further emphasizes this concentration of gains. This article delves into the reasons behind this divergence and explores the potential implications for investors.
Key Takeaways:
- Massive Performance Gap: The difference between cap-weighted (SPY) and equal-weighted (RSP) S&P 500 ETFs has surged to over 4 percentage points in December 2024, the widest gap since May 2023.
- Concentrated Gains: A minuscule portion of S&P 500 stocks (only 90) are showing positive returns month-to-date, highlighting extreme market concentration around a few megacap stocks.
- Magnificent Seven Dominance: The “Magnificent Seven” tech giants, along with Broadcom, are disproportionately boosting returns, showcasing a stark contrast to the broader market’s performance.
- Conflicting Interpretations: While some experts view persistent negative market breadth as potentially bullish based on historical data, others express caution about the potential for increased volatility.
- Sector-Specific Growth: Gains are significantly concentrated in specific growth sectors like Discretionary, Communications Services, and Technology, leaving other sectors lagging.
The Rise of the “Magnificent Eight” and the Lagging Market
The extraordinary performance of a select group of tech giants – the “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Meta, Tesla) plus Broadcom – stands in stark contrast to the broader market’s underperformance. These eight stocks alone have generated remarkable returns in December, with an equal-weighted portfolio of these stocks boasting a staggering 16% return. This is in direct opposition to the equal-weighted S&P 500 ETF (RSP), which fell by 3% during the same period. This highlights the increasingly unbalanced nature of the market, where a small number of companies are driving most of the gains, leaving a significant portion of the market struggling.
Analyzing the “Magnificent Eight’s” December Performance
The table below provides a clear picture of the individual performance and market capitalization of these eight companies:
| Name | Price Chg. % (MTD) | Market Cap ($) |
|---|---|---|
| Broadcom Inc. | 48.27 | 1.12 trillion |
| Tesla, Inc. | 37.03 | 1.52 trillion |
| Alphabet Inc. | 16.72 | 2.43 trillion |
| Amazon.com, Inc. | 11.18 | 2.43 trillion |
| Meta Platforms, Inc. | 9.15 | 1.58 trillion |
| Microsoft Corporation | 7.25 | 3.38 trillion |
| Apple Inc. | 6.52 | 3.82 trillion |
| NVIDIA Corporation | -5.94 | 3.18 trillion |
| Average | 16.26% |
This concentration of gains raises concerns about market sustainability and the potential for future corrections. The dominance of a few mega-cap companies makes the broader market index less representative of overall economic health.
Weak Market Breadth: Bullish or Bearish Signal?
The remarkably narrow market breadth, with significantly more declining stocks than advancing ones over an extended period, presents a complex situation for market analysts. Ryan Detrick, CMT, chief market strategist at Carson Group LLC, points out that the S&P 500 experienced 11 consecutive days with more decliners than advancers, a streak not seen since 1996. While many interpret this as a bearish sign, Detrick highlights that historically, following similar periods of weak breadth, the market has significantly outperformed in the following year.
Historical Data and Contrasting Interpretations
Detrick presents data demonstrating that after prolonged streaks of negative breadth, the S&P 500 has shown surprisingly strong returns over longer time horizons. While short-term performance can be negative, the longer-term outlook is frequently positive.
| Date | Days of Negative Breadth | 1-Month | 3-Months | 6-Months | 1-Year |
|---|---|---|---|---|---|
| 9/10/1991 | 8 | -2.1% | -1.4% | 6.0% | 7.9% |
| 6/20/1996 | 11 | -4.3% | 3.2% | 10.5% | 35.6% |
| 12/24/2018 | 8 | 13.3% | 19.3% | 23.9% | 37.1% |
| Average | — | 3.0% | 4.8% | 8.6% | 14.8% |
| All Years Avg (1950–2023) | — | 0.7% | 2.2% | 4.4% | 9.0% |
“Many claim this is bearish, but is it?” Detrick asks. “Looking at the longest streaks ever actually appears to be rather bullish. Significant outperformance across the board out one year.” This historical data suggests that while short-term volatility might persist, investors should consider the potential for stronger returns further down the line.
However, not all analysts share this optimistic outlook. Adam Turnquist, chief technical strategist at LPL Financial, takes a more cautious stance, highlighting the potential for a correction following similar historical instances of prolonged negative breadth. He warns that while it doesn’t necessarily signal an imminent market top or correction, it does add to the evidence of potentially weak footing.
Sector-Specific Growth and Potential for Broader Rebounds
The current market strength is predominantly concentrated within specific growth sectors. Stephen Suttmeier, CFA, CMT, analyst at Bank of America, observes that December’s gains have been heavily skewed towards Discretionary, Communications Services, and Technology sectors. He notes that “All other sectors showed a negative performance,” which directly explains the underperformance of the equal-weighted S&P 500 ETF (RSP). Despite this sectoral concentration, Suttmeier expresses cautious optimism, suggesting potential “rebounds into year-end for both the NYSE Composite Index (NYA) and RSP.”
The concentration of growth in specific sectors suggests a need for diversification and a careful assessment of individual stock performance rather than relying solely on broad market indices. Investors should pay close attention to specific sector trends and individual company performance to navigate this complex market landscape.
In conclusion, the current divergence between the cap-weighted and equal-weighted S&P 500 ETFs serves as a potent reminder of the inherent risks and opportunities in a market dominated by a small number of mega-cap companies. While short-term volatility and uncertainty might persist, historical data offers intriguing insights that could indicate a stronger market comeback in the longer term. However, investors should adopt a cautious and diversified approach, meticulously tracking both broad market trends and individual sector performance to navigate the complex dynamics of the current climate.
