Bad & Good Breadth

Joe Abbott & Ed Yardeni

The following excerpt is from Yardeni Research Morning Briefing?(May 16, 2023).

Joe and I have recently observed that the S&P 500 has a breadth problem. This is a widely recognized problem by most technicians who track the stock market. The good news is that a more fundamental measure of earnings breadth is performing well. Consider the following:

(1) If we are in a bull market that started on October 12, 2022 as we still believe, our thesis isn’t getting much support from the ratio of the equal-weighted to the market-cap-weighted S&P 500 indexes (Fig. 1). This measure of breadth was rebounding nicely since the October 12 low, but it then dropped sharply after Silicon Valley Bank hit the fan in early March.

During the start of bull markets, this ratio tends to rise, indicating that more and more stocks are participating in the bull run. The same breadth issue can be seen in the New York Stock Exchange advance/decline line (Fig. 2).

(2) Joe and I also monitor the percent of S&P 500 companies trading above their 200-day moving averages (Fig. 3). It did rebound from 15.6% on October 14 to a recent high of 72.7% on February 3. But it’s been hovering around 50.0% in recent days. We would have liked to see a more V-shaped rebound in this breadth measure.

Also disappointing is the percent of S&P 500 companies with positive y/y price changes (Fig. 4). It has remained below 50.0% since the start of the bull market and was 45.2% on May 12.

(3) The good news is that the breadth of analysts’ consensus expectations for the S&P 500’s revenues and for its operating earnings continue to rebound in V-shaped formations (Fig. 5 and Fig. 6). The percent of S&P 500 companies with positive three-month percent changes in forward revenues rebounded from a recent low of 50.6% during the week of December 30, 2022 to an 11-month high of 75.1% during the May 12 week. The same pattern can be seen in the comparable measure for forward earnings; it rebounded from 44.4% during the December 30, 2022 week to 69.9% during the May 12 week, also an 11-month high. (FYI: “Forward” revenues and earnings are the time-weighted averages of analysts’ consensus estimates for the current and next years.)

The solid rebounds in these breadth measures of revenues and earnings are typical of the early stage of bull markets.

(4) The obvious explanation for the divergence of the technical and fundamental measures of breadth since the banking crisis started in early March is that the MegaCap-8 stocks (i.e., Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Nvidia, and Tesla) were boosted by the crisis, while the S&P 500 Financials got whacked by it. However, industry analysts didn’t see the banking crisis as reason enough to lower their earnings estimates for the Financials sector’s companies, as the crisis seems to have been contained so far. Once investors conclude that the crisis is over, the technical measures of breadth should recover.

The market capitalization of the MegaCap-8 has increased 36.4% ytd (Fig. 7). The S&P 500 Financials sector is down 6.3% ytd through Friday’s close (Fig. 8).

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