Is US market strength a mirage?

The S&P 500 index is trading within a few percentage points of all-time highs, but most of the gains have been driven by just a handful of technology, semiconductor and data centre infrastructure stocks riding the AI boom.

In the third quarter of 2026, all the gains recorded by the S&P 500 were attributable to just four stocks - Microsoft, Nvidia, Apple and Meta. By the end of the quarter Nvidia, Apple and Microsoft accounted for 21% of the S&P 500’s market value, the highest ever three stock concentration.

Meanwhile, roughly 60% of stocks are trading more than 20% below their all- time highs, based on Dow Jones data, which essentially means most companies are in a bear market. A bear market is commonly defined as a 20% decline from a prior peak.

Investors holding a broadly diversified portfolio are probably sitting on losses rather than gains this year, given that more than 40% of stocks are down, according to a Reuters report.

Poor market breadth

One way of measuring the uniformity of a market is to look at the number of stocks making new highs and lows. On 14 October, 479 stocks in the broader US market, were trading at new 52-week lows, while only 60 stocks were trading at new 52-week highs.

In other words, new lows outnumbered new highs by a multiple of eight to one, which means most stocks are in bear markets.

When new 52-week lows sharply outnumber new highs while the headline S&P 500 index sits near its peaks, it points to a pattern known as a ‘bearish divergence’.

This lopsided market composition has often been seen close to market peaks, such as late 1999 during the dotcom bubble when the broader index marched higher even as the average stock quietly entered a bear market, preceding the market top in March 2000.

What does a healthy market look like?

A healthy bull market is usually characterised by expanding stock participation (good breadth) where a rising tide lifts most boats. A healthy market typically sees 70% to 80% of stocks trading above their 50-day moving average (the average price over the preceding 50 days).

Analysis by Citadel Securities head of equity and equity derivatives strategy Scott Rubner, showed that only around a quarter of stocks were trading above their 50-day moving average at the end of September, which improved to 37% by 12 October.

How could market fragility resolve itself?

A healthy development would be for the proportion of stocks trading above their 50-day moving average to move above 50%, while outperformance of the equal weighted version of S&P 500 index would indicate broader market participation.

The current earnings season must deliver on expectations beyond AI-related companies to encompass broader parts of economy including industrials, financials, healthcare and consumer businesses.

Rubner is constructive in this regard, citing strong earnings expectations and improving signs of market rotation. That said, the 10 largest contributors are still expected to account for roughly two thirds of S&P 500’s earnings growth in the third quarter.

Higher US bond yields over the past few months make future profits less valuable today and offer investors a more attractive alternative to owning shares.

September’s higher than expected inflation puts the Federal Reserve in a difficult position while core inflation remaining above target. Higher bond yields impact earnings in interest rate sensitive parts of the economy.

What does it all mean?

The bottom line is that the market can remain strong with narrow leadership, particularly if earnings remain robust, but high levels of market concentration are not sustainable.

The best outcome is for earnings growth to broaden, lagging stocks to recover, and bond yields stabilise. Whichever way the current lopsided market resolves itself, investors should ensure they remain appropriately diversified while appreciating that a rising index does not always mean a healthy market.