An Extremely Narrow Market


June 19, 2023


There has been a great deal of attention paid to the so-called narrow market in 2023 by market observers, and for good reason. Before showing you our take on the degree of narrowness present in the equity market, we think it’s important to describe what it is, and why it matters.

Narrow market breadth refers to a market with a narrow number of stocks participating in the market’s total return. In a narrow breadth market, only a few stocks are responsible for most of the performance, while most stocks are lagging the market, flat or worse.

The degree of market narrowness matters because it is seen as a potential warning sign of a trend reversal or market weakness. Many times, throughout market history, extreme narrowness has preceded market corrections and bear markets.

In the chart below, we show the year-to-date return data through June 15th, 2023. We show three return series: 1) The top ten largest impact stocks for 2023 (in light blue), 2) The S&P 500 Total Return Index (in dark teal), and 3) The S&P return minus the ten largest stocks (black line). For the record, those ten stocks are: 1. Apple (AAPL), 2. Alphabet (GOOG Class C), 3. Microsoft (MSFT), 4. Meta (META), 5. Amazon (AMZN), 6. Tesla (TSLA), 7. Nvidia (NVDA), 8. Advanced Micro Devices (AMD), 9. Broadcom (AVGO), and 10. Alphabet (GOOGL Class A).



Here are the observations:

  • Those ten stocks together returned 60% through June 15th on a year-to-date basis.
  • The S&P 500 Index returned 16%.
  • The S&P 500 Index minus the ten stocks returned just under 6%.
  • This means the remaining 490 stocks in the index trailed the index return by 10 percentage points and trailed the top ten by a staggering 54%!
  • We have seen research on calendar year measures of narrowness dating back to 1965. This is the narrowest year on record in almost 60 years.
  • Importantly, if an investor did not have exposure to at least a few of these ten stocks, they probably trailed the index year-to-date.



It is not likely the market advance will continue in this narrow fashion for the remainder of the year. Either market advance participation will broaden to include the other 490 stocks as they “catch up”, or these ten stocks will come back into the “orbit” of the market. It is true their fundamentals are improving, but not nearly to the extent their share prices are up. Consequently, their valuation levels are now quite stretched.

If you are an investor who is invested in WealthPlan’s Select Equity model stock portfolios, we hold several of these stocks, including Alphabet, Amazon, Apple, Microsoft, and Meta. If you don’t currently own these stocks, now is probably not the time to add them. We would recommend a thoughtful approach to entry points based on your unique needs, circumstances, and risk tolerance.

We believe there are many good stock opportunities in the broader market that will benefit if market breadth improves. We would include the stocks contained in WealthPlan’s Dividend Aristocrats model portfolio in this list of stocks. If the market pulls back and ten stocks fail to deliver the earnings growth implied by their prices, then the other 490 stocks will probably hold up much better.

Remember, investing seeks to balance return opportunity with the risk included in such opportunities. The risk return proposition in the remaining 490 stocks is in our estimation a better way to spend the risk budget at this time.



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