Equity Market Breadth and Sentiment Divergence (with Tom, Paul)

The Dow is moving up and some mutual funds are giving better returns than Broadcom. Something is going on with market breadth.

Tom

Kevin Gordon

There is a divergence in breadth: percentage of companies above 200-day moving average and outperforming S&P 500 on a 3-month basis remains weak due to AI hype in semiconductors. But this has resolved positively in the past.

The last time percentage of companies outperforming was sub-23% was 1973 (bear market) vs 2023-24 (corrections). This narrow leadership is the new norm.

There is very active equity issuance, including Google's mega deal and upcoming IPOs like SpaceX. What does this tell you?

Paul

Kevin Gordon

Sentiment is getting frothier, but attitudinal sentiment from investors is skittish about mega-cap IPOs, not matching behavioral flows into tech and semis. This suggests room for sentiment to stretch further upside.

Earnings have been there to support the market. Breadth of earnings growth across industries is present, though magnitude is skewed to large caps. Diversification is the best way to play this.

How do you respond to clients who are scared stiff despite your optimism?

Tom

Kevin Gordon

Advised clients don't show much fear. The biggest split is with newer retail investors who are skittish about big drops or rapid gains. Sir John Templeton's quote applies: bull markets are born in pessimism, grow on skepticism, mature on optimism, die on euphoria.

The dominant question from all age groups is AI's impact on the labor market. I have a relatively optimistic view that it won't mean tens of millions of jobs disappearing.

Are clients looking to reposition into bonds, gold, or cash?

Paul

Kevin Gordon

I haven't seen willingness to embrace markets fade materially. The bigger concern is economic, specifically AI in the labor market.

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