Key Takeaways
- Many strategists came into 2025 expecting the bull market to broaden beyond growth and tech stocks.
- After a brief widening, the market is showing “one of the narrowest readings of market breadth in recent decades,” according to Goldman Sachs.
- The US Large-Mid Index reached an all-time high in July, but the median stock in the index is trading 10.9% below its 52-week high.
- Two outcomes appear possible: recent market laggards will “catch up” to the top performers, or the leaders will “catch down” through a market correction.
Stocks have pushed to new all-time highs in July, but the rally is looking narrower than ever. Of the stocks in the Morningstar US Large-Mid Index, which tracks the performance of the top 90% of the US investable universe by market cap, only 18% reached a new 52-week high in July, and more than half are trading 10% or more below their 52-week high prices as of July 14. Further, out of the 11.4 percentage points gained by the index in the second quarter, 7.0 came from one sector: technology.
This marks a return to the highly concentrated market gains seen in 2023 and for much of 2024, when equities were led higher by the “Magnificent Seven.” Gains were concentrated among mega-sized stocks, particularly growth names from the technology and communication services sectors.
The rally showed signs of broadening following the US presidential election in November, and then again at the start of 2025. During the first quarter, tech stocks stumbled, led by losses in artificial intelligence plays like semiconductor companies. It appeared that the rally was finally widening as value stocks outperformed.
That was especially the case as the broad market sagged after President Donald Trump announced wide-ranging tariffs in early April. However, that dynamic was extremely short-lived. When the stock market rebounded as Trump reversed course and delayed the most onerous tariffs, tech names roared back and the number of winners again shrank.
At some point, the concentrated rally will end. Goldman Sachs analysts wrote in a recent report that they “expect near-term rotations below the surface of the [S&P 500] index.” They think these rotations could come either in the form of a “catch down” by the market’s top performers or a “catch up” by the stocks that have lagged.
Where Are Stocks Trading Compared with Their 52-Week Highs?
One measure of the depth of a stock market rally is the number of stocks hitting 52-week highs. The more stocks that are at fresh highs, the broader the rally. In the first half of July, only 18% of the stocks in the Large-Mid Index have seen 52-week highs. In the first half of November 2024, amid the post-election rally, 38% had hit such highs.
One can also gauge how far the median stock is trading below its 52-week high. The larger the gap, the narrower the breadth. As of last month’s end, the median stock in the Large-Mid Index was trading 10.9% below its 52-week high. While that’s better than the five-year average of 15.4%, it’s weaker than what was seen as recently as November 2024, when the median stock traded 4.5% below its 52-week high.
Drilling down to individual names, four of the top five holdings in the index are trading much closer to their 52-week highs. Nvidia NVDA is trading 2.3% below its 52-week high, Microsoft MSFT is trading 0.7% below, Amazon.com AMZN is trading 7.0% below, and Meta Platforms META is trading 3.6% below. Apple AAPL is the outlier among the largest stocks, trading 19.8% below its 52-week high.
How Concentrated Are Market Returns?
Another method, as Goldman Sachs analysts highlighted, is to subtract the median stock’s distance from its 52-week high from that of the overall index. A wider gap (a more negative number) suggests gains are concentrated among a handful of outperformers, while a narrower gap (a less negative number) indicates broader market participation.
For the Large-Mid Index, this measure reached its fourth-lowest level in the past five years at the end of June, signaling a relatively narrow rally.
Where Are the Stock Market’s Gains Concentrated?
As has often been the case in recent years, the tech sector has been a primary beneficiary of the concentrated stock market rally. In the second quarter, the Large-Mid Index returned 11.4%, with 7.0 of those percentage points coming from tech. In the first quarter, the index lost 4.7%, with tech detracting 3.9 of those points.
Morningstar chief US market strategist Dave Sekera says momentum has played a large part in the concentration. The leading tech stocks have such large market caps that when they do well, they skew broad benchmarks higher. This phenomenon essentially feeds on itself. “If you’re an institutional investor, you have to be involved in these names to keep up with all the indices,” Sekera says.
“Catch Up” or “Catch Down”?
How will this latest bout of concentration end? In the “catch down” scenario, the market’s recent winners sell off sharply while the laggards don’t fall as much. “As that upward momentum runs out of steam, there is a much higher potential for a correction, as people that are overweight in these stocks are going to want to reduce their exposures to get back towards what their market weight exposure should be,” Sekera says. “That could cause that self-feeding momentum to the downside, which is largely what we saw at the end of March and beginning of April. Selling begot more selling, as people were trying to exit positions because momentum had shifted so much to the downside.”
From a valuation perspective, growth stocks have rarely traded at such high premiums as they are now. Sekera points out that the last two times this occurred—in 2022 and ahead of the AI-driven selloff early this year—it was followed by a market pullback. And with ongoing trade negotiations and the potential return of tariffs, Sekera says the market isn’t pricing in any margin of safety, leaving it vulnerable to a near-term correction if economic disruptions arise.
Goldman Sachs analysts point to several reasons they believe the “catch up” scenario is more likely. First, they expect the Federal Reserve to resume interest rate cuts in the fall of 2025. Historically, markets have delivered positive returns in the six months following the first rate cut in a while, especially when the economy continues to expand.
Second, investor positioning is broadly neutral, meaning they are neither heavily bullish nor bearish. As perceived risks fade, Goldman Sachs analysts expect renewed interest in stocks that haven’t yet participated in the rally. Third, the earnings outlook for 2026 remains strong, and investors appear willing to look past short-term disruption from tariffs in favor of long-term growth.
Additionally, they note that even in the “catch up” scenario, a long-term structural shift away from the mega-cap market leaders is unlikely. “We believe that investors would need to embrace a substantially stronger economic growth with more Fed easing than our economists’ currently forecast,” they wrote. “The small valuation premium of the Magnificent 7 relative to the last few years reduces the likelihood that investors will rotate away from those stocks en masse in coming quarters.”
What Should Investors Do?
Sekera recommends that investors focus on valuations rather than timing either scenario. He notes that as of June 30, value stocks are trading at a particularly high discount to their fair value (12%), while growth stocks are trading at a particularly high premium to their fair value (18%). Additionally, small-cap stocks are trading at a 17% discount, while large-cap stocks are trading at a 2% premium.
From a sector perspective, Sekera thinks healthcare, energy, communication services, and real estate look undervalued, while financial services, consumer defensive, utilities, industrials, and technology look broadly overvalued.
