The stock market took a narrow path to record highs last month

The extension of the stock market’s gains fell by the wayside after the index hit record highs last month.

Just six big tech stocks accounted for more than 75% of the S&P 500’s gain in May, a move reminiscent of how the Magnificent Seven tech stocks fueled the market’s 2023 rally.

Gains in Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA) helped the S&P 500 (^GSPC) to its best May since 2003.

“We’re seeing a relatively tight market, and that tightness has increased recently and it’s really been driven by fewer stocks,” BMO Wealth Management’s U.S. chief investment officer Yung-Yu Ma told Yahoo Finance. “That’s not what you want to see for the health of the market.”

Participation by the other 493 stocks in the S&P 500 has been a feature of runs to record highs in the past six months, including through the end of 2023 and near the end of the first quarter. In May, the S&P 500 rose about 4%, while the equity-weighted index rose less than 2%. In the first quarter of the year, the difference between these two indices was close to 0.5%.

But since stocks bottomed out after a 5% pullback in the S&P 500 that ended in mid-April, the market has been all about Big Tech again.

The Nasdaq Composite (^IXIC) posted its best May in over 20 years, led by a nearly 30% gain in Nvidia shares over the past month.

Bank of America investment strategist Michael Hartnett noted that the relative price performance of the equal-weighted S&P 500 (^SPXEW) versus the market-cap-weighted S&P 500 is at its worst level since March 2009, after a comeback last year.

This narrow leadership has seen the breadth or number of stocks advance minus the number of stocks declining toward the low end of its historical range.

Data from Bespoke Investment Group released last Thursday showed that the breadth over the previous 10 trading days had fallen to the lowest performing decile since 2002. Which means that over 90% of the time, the market sees more shares that participate in profits than what prevailed at the end of May

However, the firm noted that breadth at these levels often predicts the strongest returns of each decile over the following 3-, 6- and 12-month periods.

Ned Davis Research’s chief U.S. strategist, Ed Clissold, wrote in a note to clients that “several indicators of market breadth” have not followed the recent uptick.

This could be a point of concern if the tight lead from Big Tech over the past month falls. According to Clissold, this sometimes happens when market rallies peak.

“The bottom line is that while some divergences have developed throughout the year, most of them have only been introduced in recent weeks,” Clissold wrote. “If the market is in a bull run, it is likely in the early stages. Not enough evidence has changed to warrant adjusting our overweight recommendation to US equities.”

The Nvidia logo is seen during the Impact'24 conference in Poznan, Poland on May 16, 2024. (Photo by Jakub Porzycki/NurPhoto via Getty Images)The Nvidia logo is seen during the Impact'24 conference in Poznan, Poland on May 16, 2024. (Photo by Jakub Porzycki/NurPhoto via Getty Images)

The Nvidia logo is seen during the Impact’24 conference in Poznan, Poland on May 16, 2024. (Jakub Porzycki/NurPhoto via Getty Images) (NurPhoto via Getty Images)

In a note to clients on Monday, RBC Capital Markets head of U.S. equity strategy Lori Calvasina called the latest move an “unexpected slowdown” in swing trading, citing several catalysts that give investors cause for concern .

A rise in Treasury yields has once again turned into a headwind for stocks, prompting many investors to rely on large-cap stocks. That also comes as the underlying story has been more impressive for that group as well, with earnings revised higher for large-cap tech stocks in recent weeks, Calvasina noted.

These changes come as the story of a resilient US economy that could grow more than expected this year has taken a hit.

A reading of first-quarter economic growth was revised lower during the last week of May, while the latest look at manufacturing activity from the Institute for Supply Management showed activity contracted further last month.

And in describing what could revive swing trading, Calvasina wrote: “Our work suggests that the 10-year yield (^TNX) should stop rising, the market needs more clarity and certainty about the policy path monetary and timing of cuts, earnings trends should improve for the broader market to look better than the biggest growth names, and economic excitement should return.”

Josh Schafer is a reporter for Yahoo Finance. Follow him to X @_joshschafer.

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