How sustainable is the current bull market run?

The stock market’s rally from the October 2023 low has been remarkable in several ways. For example, double-digit quarterly gains for the S&P 500® Index—11.2% for Q4 last year and 10.2% for Q1 this year—have only happened eight times since 1954. Furthermore, Q1 was the 11th-best first quarter for the S&P 500 since 1950. The index also notched 22 record highs, the third most in a first quarter on record (just trailing 1964 and 1987.)

Meanwhile, a contentious debate has persisted since the October lows about market breadth and over-concentration by mega-cap stocks, with some investors questioning the increasingly stretched sentiment and stock market valuations. Although a minor pullback or consolidation for the S&P 500 is not unwarranted—and frankly would be healthy after such a long stretch of gains—examining market breadth might offer insights into what stocks may offer going forward.

Let’s start with a definition. Market breadth refers to the number of stocks advancing versus declining within an index or sector. Investors often use market breadth to indicate the overall market’s health, as it provides insight into what’s happening beneath the surface level of the index. Higher breadth, combined with a rising value like we’ve seen in the S&P 500 as of late, indicates the rally is broad-based, suggesting the recent advance is solid and sustainable.

Another way to measure market breadth is to analyze the percentage of stocks trading above their 200-day moving averages (DMA). The chart illustrates the percentage of S&P 500 stocks currently trading above their 200-DMA, represented on the x-axis, and the forward 12-month price return for each breadth reading, displayed on the y-axis. Returns become more consistent and skew positive as market breadth improves (the green circle where around 70% of stocks are above their 200-DMA). Moreover, when at least 70% of stocks are trading above their 200-DMA, the forward 12-month price return averages approximately 10.4%, with close to 86% of occurrences generating positive returns.

Curiously, when market breadth is low—when less than 10% of stocks are trading above their 200-DMA—it seems to act as a contrarian signal that a market bottom might be occurring, even when returns are also positive (orange circle at left in the chart). All that said, the recent broadening of the rally implies that upside momentum should continue over the next 12 months, and long-term investors have less to fear from a minor pullback or consolidation.