What to make of a record-setting market rally that elicits more mistrust than fear of missing out? The S & P 500 has made an all-time high on nearly thirty days this year, four of them this past week. U.S equity wealth has never been greater, and the index path has even been pretty smooth: In eight of the last ten trading days, the S & P 500 has moved less than 0.3%. Yet the all-consuming conversation among investors is about how the advance is untrustworthy, lacking in broad participation and unreflective of an idealized soft-landing economic scenario. To note that everyone is decrying the rally’s lack of breadth is not to deny or dismiss the point. The yawning divergence in performance between a tight cluster of enormous tech companies anointed as artificial intelligence flagships and the few-thousand other stocks left behind is inescapable. And it is, in fact, the source of those tiny daily moves — violently offsetting currents suppressing index movement. The S & P 500, with 20% of its market value contained in three stocks ( Microsoft , Apple and Nvidia ), is up nearly 14% this year and essentially at a record, with the index’s equal-weighted version up just 3.4% and sitting 4% under its late-March peak. The main S & P is up more than 3% in the second quarter while its median stock is off 5% quarter to date. The broader Russell 1000 , the entire large-cap cohort, is essentially flat year to date on an equal-weighted basis. .SPX mountain 2024-03-29 S & P 500 quarter to date The S & P 500 has added $5.5 trillion in market capitalization in 2024, with roughly half kicked in by the Big Three. This combination of persistent gains in the headline S & P 500 and more churn underneath has created an odd combination of an overbought benchmark with most member stocks stalled or correcting. The index appears a bit stretched to the upside based on how far it is above its 50-day moving average and other measures. Meanwhile, fewer than half its components are even above their individual 50-day averages. Summing up the lopsided action late Friday, Bespoke Investment Group suggested: “The action this week felt like a blowoff move, with investors throwing in the towel and finally giving up on any hope for appreciation in smaller-caps and begrudgingly buying the mega-caps that have already seen ridiculously large moves higher.” It’s a plausible take, but impossible to endorse or refute with confidence. There is no single correct way for a market to behave. Sometimes, weak breadth reverses to close the gap with the heavyweights, other times it foretells an index pullback. Always, it frustrates stock pickers who seek to outperform a rampaging benchmark, while sapping conviction from most investors. Familiar market conditions? None of this is new. Over the past decade, we’ve been through “FANG” dominance, then “FAANMG,” the “Magnificent Seven” and now the “AI elite.” Periodically along the way, as the macro landscape brightened or the policy outlook eased, an all-in rally would burst into view, as in 2017, 2020 and late 2023, to build up a breadth cushion for months to come. This is currently a market beset by a scarcity of fundamental conviction, one in which the largest companies are also those with the best secular-growth prospects, healthiest forward-earnings trends and strongest balance sheets. All the multiyear thematic extremes being cited by skeptics — large over small stocks, growth over value, high- over low-quality — are essentially measuring this same preference. Market concentration is exacerbated when the “best” are also the biggest. So then, these are familiar atmospheric conditions. Yet, the particular macro-market weather patterns this month have shifted in a noteworthy way. Treasury yields have retreated dramatically, the 10-year falling from above 4.6% on May 29 to 4.22%, alongside a series of cooler inflation readings and somewhat softer economic numbers. In recent times, yields down has meant stronger breadth, with financial, cyclical and small-cap stocks getting some relief. That’s not the case thus far in June, as the market implicitly exhibits greater sensitivity to hints of an economy decelerating more than desired by the Federal Reserve or investors. The Citi U.S. Economic Surprise Index illustrates the waning momentum of domestic macro inputs relative to forecasts. Hardly an alarming descent, but one that has investors’ attention. It’s not fully clear that the Fed’s new collective rate outlook or Chair Jerome Powell’s comments after last week’s policy meeting caused a radical rethink of the policy posture, but neither was the result particularly clarifying. Going into the Fed meeting, the market was implicitly pricing in between one and two quarter-point rate cuts by year’s end. In the “dot plot” of committee projections, 15 of 19 members penciled in either one or two cuts. On and after the decision day, CPI and PPI inflation readings came in encouragingly light. The Fed has kept the overnight rate steady at the cycle high of 5.25-5.5% for 11 months, an unusually long pause. The economy has performed better than expected over that time, and inflation has slid to within sight of the Fed’s target zone. As such, the Fed is betting the cost of waiting remains low, but the market is starting to grow antsy — though not panicky — at the thought that the Fed’s patience might outlast the economy’s resilience. The ideal but far-from-guaranteed scenario is for the Fed to find a window to begin “optional” easing moves at a measured pace, rather than emergency rate cuts in haste. This all helps explain a somewhat indecisive market with weak investor sponsorship of economically sensitive groups. Yet if the market was sending up urgent flares of imminent economic danger, purely defensive sectors such as consumer staples and pharmaceuticals wouldn’t look so unwell. And, as Strategas Research technical strategist Chris Verrone notes, corporate-credit indicators remain healthy, even if spreads have widened a smidge in recent weeks. Helpfully, the widespread consternation over the poor market breadth has drained enthusiasm from the crowd, the unease over the uneven rhythms of the tape preserving a helpful wall of worry. Wall Street strategists as a group project no upside for the S & P 500 in the second half , their average and median targets both below Friday’s closing level. The weekly American Association of Individual Investors survey shows the spread between bulls and bears narrowing lately even with the S & P grinding higher. Not to suggest “everyone is bearish” in a way that makes a contrarian upside play obvious, or that the undertone of caution inoculates the market from difficulty as summer progresses. The second half of June has been among the tougher stretches of the calendar in recent years. The upside-leading semiconductor stocks are stupendously overbought and flows into the sector ETFs look overheated. The manic, frothy action around the AI and stock-split names has been localized but considerable. As I’ve suggested here before, the 5-6% April pullback in the S & P 500 seemed necessary but perhaps stopped short of a cleansing flush that would’ve perhaps generated a more energetic and inclusive new up leg. The messy churn below the surface of the index since then could just be the market’s way of refreshing itself over time. Still, with second-quarter S & P 500 earnings growth now projected at a 9% annual rate; with the majority of stocks still holding in a longer-term uptrend; with Treasury yields back in the comfort zone; and with the average stock and investor attitudes well off the boil, it’s tough to shift the benefit of the doubt over to the bears just yet.