Wells Fargo sees limited equity upside ahead this year
The US equity market continues its relentless march, with the S&P 500 touching yet another all-time high last week. But despite this months-long upward trend, strategists at Wells Fargo express caution, suggesting that there may be limited room for further growth.
The key reason behind their thesis is the market breadth, a measure of how many stocks are participating in a market movement, reflecting the market's overall health and direction.
“Broad participation in a rising market is generally a good sign for a rally’s persistence,” analysts at UBS noted.
“It has been common in past cycles, as the stock market is coming into a meaningful top, that the biggest growth names are the ones carrying the load and taking the SPX and other major indexes higher,” they added.
That’s the case this time as well, the analysts observe. For the majority of the past year, the stock market's rally has been primarily driven by increasing share prices of just a few growth and tech giants.
This trend can be observed when comparing the performance of different equity indexes. Over the past 12 months, the Russell 2000, an index that tracks 2,000 small-cap stocks, “has dramatically underperformed both the SPX and the OEX,” the analysts said.
“That is a clear reflection of decreasing market breadth and is a meaningful negative when trying to gauge the underlying strength of the overall stock market,” they wrote.
“The bottom line is, from a market-breadth standpoint, an analysis of the current data shows a narrow array of stocks (the biggest of the big) pushing the indexes to new record highs. That is a meaningful concern and helps support our belief that limited equity upside lies ahead over the balance of this year,” they added.
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