© Reuters. Wells Fargo sees limited capital improvement this year
The US stock market continues its relentless march, with the S&P 500 hitting another all-time high last week. But despite this months-long bullish trend, Wells Fargo strategists express caution and suggest there may be limited room for further growth.
The key reason behind his thesis is market breadth, a measure of how many stocks participate in a market move, reflecting the overall health and direction of the market.
“A broad participation in a rising market is generally a good sign of the persistence of the rally,” the UBS analysts noted.
“It has been common in past cycles, as the stock market is making a significant high, for the fastest growing names to be the ones carrying the load and driving up the SPX and other major indices,” they added.
This is also happening this time, analysts note. For most of the past year, the stock market rally has been driven primarily by rising stock prices of a few tech and growth giants.
This trend can be observed when comparing the performance of different stock indices. Over the past 12 months, the Russell 2000, an index that tracks 2,000 small-cap stocks, “has dramatically underperformed both the SPX and OEX,” the analysts said.
“That is a clear reflection of declining market breadth and is a significant negative when it comes to gauging the underlying strength of the broader stock market,” they wrote.
“The bottom line is that from a market breadth standpoint, an analysis of current data shows a narrow range of stocks (the biggest of the big) pushing the indices to new all-time highs. “This is a significant concern and helps support our belief that we are in for limited upside in the stock for the remainder of this year,” they added.
