The S&P 500 strung together 37 record highs this year aboard an 18.1% rally, as of July 10. The advance has largely been
powered by a handful of mega cap names tied to technology and/or artificial intelligence. In fact, six stocks — NVIDIA (NVDA),
Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Meta (META), and Alphabet (GOOG/L) — are responsible for nearly twothirds
of the S&P 500’s total return this year. As highlighted in the chart below, the Magnificent Seven, which adds Tesla
(TSLA) to the aforementioned six stocks, is up 51% on an equal weight basis. Without these seven stocks, the S&P 493 (ex
Magnificent Seven) would only be up 8.3%.

For the rest of the market, performance has been positive but not nearly as exciting. The average stock, proxied by the equal
weight S&P 500, is up only 4.6% this year, underperforming the cap-weighted S&P 500 by 13.5%, marking the largest delta
since 1998.

Returns Remain Bifurcated Between Mega Caps and the Average S&P500 Stock

Source: LPL Research, Bloomberg 07/10/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Limited participation in the latest leg higher for the broader market has created notable divergences between price and a longlist of breadth metrics. Divergences can often be temporary and do not imply the bull market run is over. However, they doserve as a warning sign for a potentially weakening rally and trend reversal. One of the many ways to measure the internal strength of the market is to analyze how many stocks within an index are actually outperforming, along with what sectors areleading or lagging. The table below highlights how many stocks within the S&P 500 are beating the index this year, also broken down by sector. At a high level, fewer than 25% of S&P 500 stocks are outperforming this year. Technology has dominated at the sector level,but only half of the stocks are beating the tape. While tech sector leadership is welcomed, the lack of other cyclical stocks out performing is a concern, although notable underperformance in consumer staples, real estate, and utilities helps alleviate concerns over a shift toward defensive leadership.

Summary
The S&P 500 remains in a bull market and above its longer-term uptrend. However, overbought conditions paired with overhead resistance and diverging breadth point to growing risk for a pullback over the near term. The dwindling list of new highs among S&P 500 constituents, a diverging advance-decline line, underwhelming volume, and extremely overbought conditions in technology and semiconductors add to the evidence this rally could be due for a breather. This does not denote a shift in our confidence in the longer-term bull market, and as a reminder, a 10% drawdown during the second half would align with historical trends for the S&P 500. Based on this backdrop, we recommend a neutral equities allocation and tactically buying dips over chasing the latest rally.

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