Few Stocks Leading the Market: A Pattern Repeats
A recent chart by Global Markets Investor highlights an interesting pattern in the S&P 500. It shows the percentage of companies that are outperforming the index at any given time. Historically, whenever the number of outperforming stocks drops to very low levels, it signals a period of high concentration—where only a few stocks are driving the market upwards while the majority lag behind. This has happened several times in the last 35 years, most notably in 1998-99, 2000, and even 1990 to some extent.
What Happens After Low Outperformance?
Each time the percentage of outperforming stocks has dropped significantly, the market has followed with a broad-based rally in the coming years. This means that while only a handful of stocks are currently leading the index, eventually, the rest of the market catches up. This trend has played out in past market cycles, leading to significant growth once underperforming stocks start participating. The years following such periods have seen massive rallies, where more companies begin to contribute to the index’s rise.
Current Market Situation
Right now, the S&P 500 is showing a similar setup, with only a small fraction of stocks outperforming. Currently, 71% of stocks in the index are underperforming. This suggests that a shift could be on the horizon, where stocks outside of the current market leaders start to gain traction. If history repeats itself, we could see a broad market rally in the coming years, with lagging stocks finally beginning to contribute to the index’s gains.
Could This Apply to Indian Markets?
While this data is specific to the US, similar trends are often observed in other global markets, including India. Unfortunately, we do not have direct data for Indian stocks, but the logic remains the same. A high concentration of outperformers eventually gives way to broader market participation, which could mean that mid-cap and small-cap stocks, or currently underperforming sectors, might see strong gains in the coming years. India, however, appears to be in a healthier position compared to the US in terms of the percentage of stocks outperforming the broader market.
WeekendInvesting launches – PortfolioMomentum Report
Momentum Score: See what percentage of your portfolio is in high vs. low momentum stocks, giving you a snapshot of its performance and health.
Weightage Skew: Discover if certain stocks are dominating your portfolio, affecting its performance and risk balance.
Why it matters
Weak momentum stocks can limit your gains, while high momentum stocks improve capital allocation, enhancing your chances of superior performance.
Disclaimers and disclosures : https://tinyurl.com/2763eyaz
