The topic of narrow leadership and participation has been around this year in various flavors, most notably in the aftermath of the minor 5% pullbacks in September and most recently. Dip-buyers have continued to show their strength, snapping up any drawdown the mega-caps show.
As we wrapped up trading last Friday, with the S&P 500 at a new 52-week high, the average stock was down 10.4%, while nearly 17% of the index was off its record-high by at least 20%.
Market components aren’t required to contribute equally, but broad participation is a bullish sign that the market is healthy.
This year, just a handful of stocks contributed to the bulk of the gain obtained by the large-cap S&P 500 index. As the year progressed, an increasing number of stocks have been unable to keep up with the index, finishing on Friday with just 46.8% of stocks outperforming the index year-to-date.
Individual Stock Contribution To S&P 500 Return Year-To-Date
There’s been a lot of discussion by financial writers and bank analysts about the extremely narrow contribution to returns within the NASDAQ 100. The pie chart shows just five of the 100 stocks carrying the most water are getting passed around.
I prefer to focus on the S&P 500, which was the topic of my study on the percent of stocks contributing to the index performance. Below we have the YTD contribution by each S&P 500 stock, sorted by index weighting and then put in groups of 10.
As you can see on the chart below, the top 10 S&P 500 stocks have accounted for 40% of the year-to-date gain. Truly amazing. 
Individual Stock Contribution To S&P 500 Return Over Last 3 Months
Let’s look at the percent contributed to the last three months of the S&P 500 gain. Again, just the mega-caps, the top 30 stocks, accounted for 73% of the gain. Just the top 10 stocks account for more than 50%.
When did Standard & Poor’s ditch 450 of its constituents?
Below is a study showing each year’s percent of stocks outperforming the index, going back to 2006.
Typically, we see 55% to 60% of stocks outperform the index, with several years seeing a drift lower into year-end. Only rarely do we get below 50% or to current levels near 46%.
A few periods stand out: at the 2007 peak, we got to 46%, also at the 2009 low–when many stocks were assumed left for dead–we went below 45%. We saw a low level of outperformance near the 2015 high as the index stagnated and few stocks were able to show strength. Finally, more recently, in Q4 2018 and at the end of the year in 2019, we saw a move under 46% as breadth narrowed.
Annual Stock Outperformance: 2017-2021
Here’s a look at the same chart for 2017 to today. It is clear 2017 was a strong year for the index, which received good support from individual stocks. Then, 2018 saw a steady drift lower from 60% to 44%. By the time the index broke lower, we witnessed a similar move as we’ve experienced this year – a slow bleed lower. Then, the Q4 drop in the index played “catch down” to how the individual stocks were performing, declining 20%. During that time, we saw a strong improvement in stock relative performance, finishing the year with north of 60% outperforming.
Coming out of the COVID crash, the index saw an extremely strong V-shaped recovery, outpacing most stocks until later in the year.
In 2021 we had strong outperformance by individual stocks in the first part of the year, and then things began breaking down in the summer, moving under 45% over the last couple of weeks.
While the sample size is small, when we’ve seen this small number of stocks able to outperform the index, the SPX was more susceptible to a bearish move than when the majority of stocks showed strength.
So What Does It Mean?
In the simplest terms, it means that the stock market is heavily reliant on just a handful of stocks.
This isn’t particularly problematic if these stocks don’t disappoint. However, it does make the market more vulnerable to bearish headwinds should that handful of stocks not deliver and the market begins to “chase down” the other large-cap components that have struggled to keep up.
The year 2021 has been a poster child for a market that can bend due to narrow breadth but not break as a result. Will this last in perpetuity? History would suggest not, but it doesn’t set an expiration date either.