This is a deeply divergent stock market that almost no one saw coming and few are enjoying, but most everyone seems to think is about to resolve in their favor.
The extraordinary split between the headline S&P 500 pinned just under a record high and the median stock in the index struggling in a 16% drawdown has been the lead topic of conversation on Wall Street. And entering this week, a consensus is coalescing around the idea that last week's tentative firming in the majority of stocks will bail out investors not fully committed to the mega-cap leaders.
There was a time when semiconductors wallowing 17% below their peak and big banks off 13% would be hazard warnings for the leadership profile and staying power of a bull market just crossing its fourth birthday.
Goldman Sachs co-head of equity-derivatives sales Lee Coppersmith puts it this way: "By our preferred GS measure, breadth has now deteriorated to its weakest level since the DotCom Bubble. The headline index continues to mask just how difficult the tape has been underneath. The big question we're getting from clients now is whether the market narrowness is a warning sign for the broader market. I'm increasingly of the view that it isn't, and continue to favor SPX higher over the next 1-3 months."
Morgan Stanley equity strategist Mike Wilson, who has been extolling the market's prospect for broadening performance on the back of broadening earnings growth, notes that rising Treasury yields have rewritten that script. No worry, he argues, because the risk has been taken out of most stocks entering earnings season: "Higher rates are being felt most acutely in the average stock, but the de-rating there has also run well ahead of any deterioration in earnings. If yields stabilize and revisions hold, that leaves room for a catch-up."