Key Takeaways

• The S&P 500 has climbed to record highs lately, but weakening market breadth shows fewer stocks are driving the rally.

• Morgan Stanley and Goldman Sachs analysts see buying opportunities where stock prices haven’t kept pace with earnings growth.

A shrinking number of stocks are driving the market’s rally lately. That could mean an opportunity to pick up quality names at a discount, according to some experts.

While the S&P 500 keeps hitting fresh highs—it finished the week less than 8 points from Tuesday’s closing record—the number of stocks contributing to its rise has dwindled as outperformance from the tech sector masks broader weakness.

The S&P 500’s market breadth, which measures the number of stocks that have participated in the index’s broader trend higher, recently hit its lowest level since the dotcom bubble, according to analysts at Goldman Sachs, with the median stock in the index nearly 20% off its all-time highs.

“However, recent economic growth data have been strong and S&P 500 earnings revision breadth has remained positive,” the analysts wrote, indicating that for many companies in the index, stock performance hasn’t kept up with earnings growth.

Analysts at Morgan Stanley told clients in a note earlier this week that could mean an opportunity to snap up recent laggards, with most companies seen reporting solid earnings growth in the coming weeks.

“To us, that creates opportunities to own quality in areas where price has corrected much more than the fundamentals, including in more asset-heavy cohorts,” they wrote, with industrials seen offering the “best risk/reward” in their view.

“The main risk is a renewed spike in bond volatility that tightens liquidity and financial conditions,” they wrote.

Read the original article on Investopedia