- Concerns of mega-cap tech dominance in the stock market are overblown, according to Ned Davis Research.
- NDR highlighted two signals that suggest market breadth is actually quite healthy.
- "It is okay for mega-caps to lead if they are taking other stocks with them," NDR said.
Ongoing concerns about mega-cap tech stocks dominating the stock market are overblown, according to a recent note from Ned Davis Research.
"Near the top of the list of the bears' concerns is that most of the gains in the popular averages can be attributed to a handful of stocks. That many of those stocks rallied on AI excitement and sport high price/earnings ratios adds to the consternation," Ned Davis Research strategist Ed Clissold said.
"A narrow market is a dangerous market," Clissold concedes, adding that the top 10 stocks currently account for 33.7% of the S&P 500, which is historically elevated.
But Clissold also highlighted that underlying breadth, which measures the number of stocks participating in the ongoing stock market rally, is actually healthy based on two technical indicators.
"Focus on mega-cap tech's attribution to returns misses that most stocks are in uptrends," Clissold said.
Nearly seven in ten stocks are in long-term uptrends, according to the note, which highlights the percent of stocks above their 200-day moving averages. That's considerably higher than prior periods of narrow stock market leadership that eventually ended with a sizable sell-off.
"Nearly 70% of stocks in the NDR Multi-Cap universe are above their 200-day moving averages. In contrast, at the 3/24/2000 peak in the S&P 500, 45% of stocks were above their 200-day moving averages, and the percentage fell as low at 31.2% in February 2000," Clissold said.
NDR crunched the numbers and found that when the percent of stocks above their 200-day moving average is above 61%, as it is today, stocks gained an average of 11.4% per year and were up 53% of the time. That's considerably higher than when the percent of stocks above their 200-day moving average is below 61%, as the above chart shows.
That strength in participation among stocks is also present in small-cap stocks, which bears commonly highlight as a point of concern for the broader stock market.
"Even amongst small-caps, which have underperformed year-to-date, breadth is healthy. Nearly 62% of stocks in the NDR Small-Cap universe are above their 200-day moving averages," Clissold said.
"If mega-cap tech stocks were the only stocks rallying and the rest of the stocks were declining, then their concern would be legitimate," Clissold said of investors who currently hold a bearish view on the market.
But for now, as mega-cap tech stocks power the stock market higher, it's ultimately health market action for as long as breadth remains healthy.
"It is okay for mega-caps to lead if they are taking other stocks with them," Clissold said.