The S&P Is Soaring, But Two-Thirds Of Stocks Are Stalling

The S&P 500 has reached 28 closing highs this year and is up 103% since the start of 2023, slightly more than doubling excluding dividends. Those gains have come despite stubborn inflation, rising interest rates and financial tightening, and falling consumer confidence.

Analysis

Analysis — Rally resilience raises the bar for incremental risk. The market’s ability to absorb restrictive macro signals suggests investors are prioritizing earnings durability and liquidity over near-term economic softness. That supports dip-buying in the short run, but it also makes the market more sensitive to any evidence that earnings expectations—not just sentiment—are failing to catch up with valuations. A sticky-inflation surprise could pressure both sides of the equity valuation equation: weaker growth estimates and higher discount rates.

The key unknown is breadth. If gains are concentrated in a small group of large-cap stocks, index strength may overstate the health of the average company and leave cap-weighted exposure vulnerable to crowded exits. If participation is broadening alongside earnings revisions, the advance is more durable and equal-weight exposure may have room to catch up. Verify breadth, forward earnings revisions, real yields, and fund/option positioning before sizing that distinction.

Over the next 1–3 months, inflation releases and earnings guidance are the main tests; a benign inflation trend with stable revisions would reinforce the momentum case. Over 6–18 months, persistent real-rate pressure or weakening profits could expose the gap between index performance and underlying fundamentals. The contrarian risk is not simply that the rally is overextended: it is that investors may be underestimating how much good news is already required to sustain further multiple expansion.

Key Decisions for Investors

• Do not add broad equity beta solely because the index is making highs. Keep existing exposure, but require improving market breadth and positive earnings-revision breadth before increasing risk; track equal-weight versus cap-weight performance (RSP/SPY) as a confirmation signal.
• If participation broadens and earnings revisions hold, consider a measured relative-value long RSP versus SPY rather than an outright market chase. Cut or avoid the trade if equal-weight relative performance rolls over while real yields rise.
• Treat a move higher in real yields alongside downward earnings revisions as a hedge trigger: evaluate a defined-risk SPY put spread only after checking implied volatility and hedge cost. The thesis is falsified by cooling inflation, stable or improving revisions, and broadening participation; absent those signals, avoid forcing a directional trade.