Some strategists are souring on the artificial-intelligence ("AI") trade...
Global investment firm Goldman Sachs recently slammed the new technology in a report titled "Gen AI: Too Much Spend, Too Little Benefit?"
In the report, researchers highlight how many companies are preparing to spend an estimated $1 trillion on AI in the coming years. And yet, "this spending has little to show for it so far beyond reports of efficiency gains among developers."
Of course, the long-term value of generative AI remains to be seen. It could be years before the technology generates a return.
And with ultra-high valuations in AI players like Nvidia (NVDA) and Microsoft (MSFT), it's clear that "bubble behavior" is forming in the tech sector today.
But even if AI stumbles, it might not be enough to knock down the current bull run. As I'll explain, a major new tailwind has just reached the broader market.
Bearish investors will tell you the bull market still has one big problem. It's too "narrow" – meaning only a few stocks are propping up the market.
Just look at the "Magnificent Seven" tech stocks, for example. They've posted massive gains this year, which helped lift the entire S&P 500 Index average. Meanwhile, smaller companies in the S&P 500 are lagging.
So here's where it gets tricky... As the bears point out, only a few of these mega-cap stocks need to fall to bring everything crashing down.
And right now, we're in one of the narrowest markets in history...
We can see this by counting how many individual stocks are outperforming the S&P 500. The fewer the outperformers, the narrower the market.
And today, the percentage of outperformers is at a record low. Take a look...
A bull market this narrow can resolve in one of two ways... either the gains broaden out or the market crashes.
Luckily, it looks like we're entering the "broadening" phase. And that should propel this bull market higher.
We can see the broadening bull run using the ratio of the S&P 500 Equal Weight Index to the S&P 500...
You see, the U.S. benchmark – the S&P 500 Index – is "market-cap weighted." That means the bigger the company, the more of the index it occupies.
However, the S&P 500 Equal Weight Index levels the playing field. It gives every stock in the index an equal share of the weight. This lets us see whether a broad spectrum of companies is rising or falling, rather than just focusing on the big ones.
So, by watching the ratio of the Equal Weight Index to the S&P 500, we can measure market breadth. And on Thursday, this ratio staged a massive leap. Check it out...
The ratio jumped 2% in a single day. That's a rare move. The last time we saw a breadth thrust like this was in October 2020.
I wanted to see what similar one-day jumps in this ratio meant in the past. But as it turns out, this action is extremely rare. The ratio has only jumped 2% five times since 2003.
As a result, I had to lower my threshold to get a big enough sample size. So instead, I found every occasion the ratio jumped at least 1% in a single day.
Even with this wider net, the ratio made this jump on 1% of days in the past 21 years. So it's still a rare signal.
But it was overwhelmingly bullish for stocks going forward. Take a look...
The S&P 500 has produced an average return of 9% a year going back to 2003. But that return soars when a breadth thrust like we saw on Thursday occurs.
When this ratio jumped 1%, stocks returned an eye-popping 10% in an average three-month period. In six months, they returned 18%. And after a year, they returned 32% on average.
The signal more than triples the performance of a typical buy-and-hold strategy in every time frame.
Even better, this signal was highly reliable. Stocks were up 87% of the time after the signal appeared. So stocks have history on their side today, too.
In short, don't let the bears' "narrow" narrative scare you out of stocks. The bull market has started its broadening phase... And history tells us stocks are likely to soar higher from here.
Good investing,
Sean Michael Cummings
Further Reading
"When it comes to investing, you want to follow the trend," Brett Eversole writes. And right now, the trend is in our favor. According to history, this momentum is likely to continue in the months to come... Read more here.
"A rare divergence is setting up in the market," Brett writes. Some folks might see this divergence as a warning sign. But that's not the case today. This signal tells us the bull run has plenty of room to run... Learn more here.
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
L3Harris Technologies (LHX)... "offense" contractor
Morgan Stanley (MS)... financial giant
Royal Bank of Canada (RY)... financial services
Ally Financial (ALLY)... financial services
Moody's (MCO)... credit-ratings firm
S&P Global (SPGI)... financial analytics
Aflac (AFL)... insurance
Eli Lilly (LLY)... pharmaceuticals
NetApp (NTAP)... cloud storage
Corning (GLW)... smartphone glass
Universal Display (OLED)... lighting and displays
Electronic Arts (EA)... video games
Unilever (UL)... household brands
Burlington Stores (BURL)... bargain retailer
Ollie's Bargain Outlet (OLLI)... discount retail
Cintas (CTAS)... uniforms
Agnico Eagle Mines (AEM)... gold
Wheaton Precious Metals (WPM)... precious metals
Watsco (WSO)... HVAC equipment
Teradyne (TER)... automation
Waste Connections (WCN)... trash and recycling
NEW LOWS OF NOTE LAST WEEK
American Airlines (AAL)... airline
Yelp (YELP)... online reviews
Estée Lauder (EL)... cosmetics
Lululemon Athletica (LULU)... athleisure
Five Below (FIVE)... discount retail
