What if the S&P 500 fumbles its bear-market exit? What strategists think of the role of tech in this rally.

A close above 4,292.48 would mark a 20% rally off the bear-market closing low of 3,577.03 set on Oct. 12, 2022, according to Dow Jones Market Data. That would meet a widely used definition of the end of a bear market.

See: S&P 500 nears bear-market exit. Will Big Tech’s rally finally spread to the broader stock market?

While the recent upside swing may have the potential to continue in the near term, some market analysts remain skeptical of the big-picture sustainability of the latest stock-market rally, as robust gains have occurred only in a small group of biggest tech names. 

For example, the two largest companies in Technology, Communication Services, and Consumer Discretionary each comprise approximately 50% of the market capitalization of their respective sectors, resulting in extraordinary influence on valuation and returns, essentially masking the weakness in other areas of the market, said a team of analysts led by John Lynch, chief investment officer at Comerica Wealth Management.

“The average forward price-to-earnings ratio for the largest six companies in the S&P 500 is approximately 36 times next twelve-month profits, which is essentially double that of the overall index,” they said in a Monday note.

The market-capitalization weighted S&P 500
SPX,
-0.20%,
which has risen 11.3% year to date, is beating its equal-weighted counterpart
SP500EW,
-0.34%,
 which is up 1.5% this year, by nearly 10 percentage points in 2023. That’s the biggest margin of outperformance year to date on record, according to Dow Jones Market Data. 

“While the S&P 500 is essentially back to its August highs at around 4,300, the equal-weight S&P is around 6% below that and around 7.5% below February levels,” Jonathan Krinsky, chief market technician at BTIG, wrote in a Sunday note. “The jury is still out as to which way this divergence resolves itself. In the near term, we can see some further rotation into the laggards, but we continue to think that it has difficulty sustaining beyond a bounce.” 

See: Small-cap stocks lag in 2023, but here’s where they’re ‘finally’ starting to see positive earnings revisions

However, Stephen Hoedt, managing director of equity and fixed income research at Key Private Bank, said focusing on the negative is probably the wrong message for investors, since he expects overall performance to improve, rather than continuing to see less than 10 individual stocks driving gains for the S&P 500.

“This kind of breadth divergences can usually resolve themselves in one of the two ways,” Hoedt said. The market-cap weighted index can either have prices hatched down to where the poor market breadth is or act as leadership until the equal-weighted index catches up with breadth improving to where the market-cap weighted index has bet. 

“If you look historically, two-thirds of the time, the market-cap weighted index acts as leadership for the equal-weighted index, and the equal-weighted index plays catch up,” Hoedt told MarketWatch in a phone interview. 

U.S. stocks finished lower on Monday with the Dow Jones Industrial Average off nearly 200 points, or 0.6%, to end at 33,562, while the Nasdaq Composite shed 0.1%.

— Katie Marriner contributed to this article