Will Historic Lows in Market Breadth Trigger a Stocks Crash?

Market concentration refers to periods when a few stocks or a single sector dramatically outperform the rest of the market, driving a disproportionate share of index gains. In such times, market breadth is “narrow” meaning the rally relies on a small cluster of leaders while the majority of stocks lag.

Over the past 50 years, several notable episodes of narrow leadership have occurred. We examine key periods of market concentration, the big picture conditions and catalysts behind them, which sectors dominated, and how the S&P 500 performed in the aftermath.

Most importantly, we then draw inferences on what today’s conditions mean for the future of the S&P 500.

Key Points

• Throughout history, narrow market leadership has often preceded either major crashes or broadening rallies.
• The “Magnificent Seven” now control a record share of the S&P 500, mirroring past peaks that led to either corrections or continued gains.
• History shows both collapses and rotations. Traders should monitor market breadth, Fed policy, and economic trends while maintaining sector balance to hedge against a shift in leadership.

Historical Instances of Narrow Market Leadership

Early 1970s, The Nifty Fifty Era

In the late 1960s and early 1970s, a group of elite growth stocks dubbed the “Nifty Fifty” captivated investors. Companies like IBM, Xerox, Polaroid, Coca-Cola, Disney, and McDonald’s were considered “one-decision” stocks that one could buy and hold forever.

This fervor led to extremely high valuations. For example, the average P/E of the Nifty Fifty reached about 42x earnings, more than double the broader market’s P/E. These mega-cap names spanning tech, consumer staples, healthcare, and industrials significantly outperformed the rest of the market heading into 1972.

By late 1972, the top five stocks in the S&P 500 accounted for ~23% of the index’s market cap, a level of concentration not seen since until very recently.

The U.S. economy was initially strong, but inflation pressures were building. The catalyst for the Nifty Fifty’s downfall was a turn in the economic cycle. In 1973, the U.S. entered a recession amid the OPEC oil embargo and spiking inflation, which punctured the lofty valuations of these market leaders.

A brutal bear market followed from January 1973 to late 1974. The S&P 500 fell over 14% in 1973 and another 26% in 1974, while the overvalued Nifty Fifty stocks fell even more sharply (–19% and –38% in those years). Essentially, the narrow leadership collapsed under the weight of stagflation and rising interest rates.

Subsequent returns were poor in the wake of this concentration bust. From the peak in late 1972, the S&P 500 lost roughly a third of its value over the next two years. It took years to recover. In fact, over the five years 1973–1977, the S&P 500’s annual gains averaged only ~2.5%, while the former Nifty Fifty stocks continued to lag and many never regained their prior glory.

High-flying blue chips like Avon and Kodak went from market darlings to major underperformers once their growth prospects proved unsustainable. This episode shows how a narrow, euphoria-driven market can reverse violently when macro conditions deteriorate. The sector leadership here was broad in terms of industry from tech to consumer staples, but the common thread was excessive valuations on large-cap growth names.

Late 1990s, The Dot-Com Bubble

The dot-com mania of the late 1990s is another classic case of market concentration. Explosive growth in the internet and technology sector sent tech stocks soaring, while many traditional industries lagged behind. From 1995 to 1999, the Nasdaq Composite surged over 400%, far outpacing the broader market.

By 1999, the S&P 500’s gains were heavily driven by a handful of big tech and telecom stocks – companies like Microsoft, Cisco, Intel, Oracle, Lucent, AOL, and Dell. The technology sector dominated the S&P, and growth stocks vastly outperformed value stocks.

The breadth of the market grew exceedingly narrow and one analysis noted that in 1999 the top 15 performing stocks in the S&P 500, mostly tech names, contributed roughly 70% of the index’s total gain that year. In other words, outside of the tech high-fliers, the market was relatively flat.

The late ’90s economy was strong with low inflation and booming productivity but valuations in tech reached extreme levels. The catalysts fueling the narrow rally were rapid adoption of the internet, huge venture capital investment in dot-com startups, and investor speculation on any tech company with a “.com” in its name, often despite lackluster earnings.

The Federal Reserve raised interest rates in 1999–2000 to cool the exuberance. Ultimately, in early 2000 the bubble burst.

The “weak breadth” dynamic lasted several years from 1995 up to the March 2000 peak, tech soared while many other stocks stagnated When investors finally rotated out of these overextended leaders, the dot-com crash began. The NASDAQ plunged nearly 80%, and the S&P 500 also suffered a major drawdown as tech giants collapsed.

The S&P 500 peaked in March 2000 and then entered a grinding bear market for the next two+ years. In the 6 months after the peak, the S&P 500 fell roughly 8–10%. Within 12 months, it was down over 20%. Two years later, by early 2002, the index was still down around 25% from the peak and would fall further before bottoming in late 2002.

In total, the S&P 500 dropped nearly 50% from 2000–2002 during the dot-com bust. The tech sector, which had led the late ’90s rally, was hit the hardest, with many high-fliers losing 80–100% of their value. This period underscores that when market concentration reaches extremes.

In 2000, the top 5 stocks were ~18% of the S&P, a then-record concentration, a reversal can be severe if the fundamentals don’t justify the prices. The late ’90s leaders were mostly Tech and Telecom stocks, and they collectively cratered after 2000.

Mid-2000s – Energy and Financials Preceding 2008

In the mid-2000s bull market (2003–2007), leadership rotated into different sectors, but toward the end there was again a narrowing of breadth.

By 2007, even as the S&P 500 notched a record high, many stocks were weakening under the surface. Two sectors dominated the late-stage rally. Energy and select Financial/Real Estate plays.

Booming commodity prices (oil hit $140+ in 2008) propelled energy stocks, such as ExxonMobil, Chevron, to outsized gains, while the broader index was under strain from early cracks in credit markets.

In 2007, for example, energy stocks were up nearly +30% and represented an increasing share of the S&P 500, even as financial stocks, a huge portion of the index, began to fall amid the brewing subprime crisis.

This created a narrow market where only a small number of sectors (and stocks within them) held up the index. The breadth in late 2007 was poor – Goldman Sachs noted that market breadth narrowed sharply ahead of the 2008 recession, as investors crowded into the last outperforming areas, like oil and commodity-related equities.

The late 2007 environment saw rising economic risks thanks to the housing market that was unraveling and credit stress was mounting, though equity indices remained near highs thanks to the narrow leadership. The catalyst here was the bursting of the housing/credit bubble.

Once financials and real estate stocks broke down in 2008, they dragged the whole market into the Global Financial Crisis.

Energy stocks, which had initially been resilient, even rising into mid-2008 on record oil prices, finally collapsed as global demand prospects and liquidity dried up.

The concentration in a few sectors gave way to a broad crash. After the October 2007 peak, the S&P 500’s subsequent returns turned sharply negative. Six months later by spring 2008, the index was down roughly 10%. A year after the peak in late 2008, the S&P was down over 35%, deep in the throes of the financial crisis. Two years later by late 2009, the market had begun to recover but was still about 20–30% below the 2007 highs.

In sum, this episode demonstrated that narrow rallies in late-cycle phases (in this case, largely confined to energy and a few global growth stocks) can signal vulnerability.

Once the macro environment, the credit system, gave way, the previously leading stocks also succumbed, resulting in a severe bear market.

The sector concentration in 2007 was unique with Energy as a big winner, while Financials were a ticking time bomb but the pattern of narrow breadth preceding a downturn echoed the prior busts in 1973 and 2000.

2015, The FANG-Led Market

By the mid-2010s, the U.S. was in a prolonged bull market, but market breadth thinned notably in 2015. The S&P 500 ended 2015 roughly flat with +1% total return, yet this masked an important detail that virtually all the gains came from just a handful of superstar stocks.

Specifically, the “FANG” stocks – Facebook, Amazon, Netflix, Google (Alphabet) along with a few others like Apple and Starbucks, were responsible for the index’s positive performance, while the average stock declined.

These tech and consumer-centric growth names surged in 2015 (Amazon +114% that year, Netflix +134%, etc.), even as many sectors (energy, materials, industrials, small caps) fell.

Goldman Sachs analysts noted “just five stocks with outsized returns accounted for the strong performance of the S&P 500; hundreds of others underperformed”

Market breadth hit historically low levels. For example, a Goldman breadth index was “less than 2” at one point, versus a long-term average around 35 on that scale.

This situation earned nicknames like the “Nifty Nine” for the ultra-small group of market leaders, hearkening back to the Nifty Fifty era. The sector leadership here was firmly in Technology and Consumer Discretionary, such as e-commerce, streaming, social media.

2015 saw a global growth slowdown and an earnings recession in many industries, even though the U.S. avoided an official recession. The Federal Reserve was preparing to raise interest rates with the first hike coming in late 2015, which created uncertainty.

Meanwhile, tech and internet companies were relatively insulated and continued to deliver high growth, attracting investor dollars. A catalyst for the narrowness was that these FANG firms were perceived as transformational businesses with strong earnings momentum, justifying their outperformance even in a slow-growth environment.

Unlike the prior examples, the narrow market of 2015 resolved to the upside. Fears that “breadth was too narrow” did not result in a major crash.

In early 2016, the market did pull back, a shallow correction amid global growth worries, but soon breadth broadened. Cyclical and value stocks caught up in mid-2016 and especially after the U.S. election in November 2016.

The S&P 500 posted solid gains in the subsequent periods. Six months after the 2015 narrow breadth phase (by mid-2016), the S&P 500 had eked out a small gain.

In short, the rest of the market “caught up” to the initial leaders. This scenario – where narrow leadership expands into a wider bull market – is an example of a positive resolution of narrow breadth. Historical studies show this often happens: “at least as often” as market leaders collapsing, the laggards can catch up and extend the rally.

The 2015 episode, driven by tech leaders, proved to be a case where narrow strength was a precursor to more broad-based gains rather than an immediate bearish omen.

2020, Tech Surge Another Narrow Rally

In early 2020, the health outbreak triggered a market crash and then an unusually narrow recovery. By mid-2020, as the S&P 500 rebounded off the March lows, the gains were disproportionately driven by mega-cap tech and digital economy stocks.

Companies like Apple, Microsoft, Amazon, Facebook, Google, and Netflix – beneficiaries of the stay-at-home economy – soared to new highs, even as many other stocks in travel, small-caps, and banks were still well below pre-pandemic levels.

Once again, a few stocks propped up the index and by August 2020, the top 5 names in the S&P 500 made up 23% of the index’s market cap, the highest concentration since 1972. This prompted comparisons to the Nifty Fifty era. These tech giants were sometimes referred to as FANMAG or FAAMG, and soon expanded to the “Magnificent Seven”, adding Tesla and Nvidia by 2021.

This period brought unprecedented monetary and fiscal stimulus, which suppressed interest rates and boosted liquidity. Tech companies had stellar results despite the recession e.g. Amazon’s earnings +84% in 2020 while traditional industries suffered.

The catalyst for the narrow rally was the market’s realization that the “digital revolution” had accelerated so businesses with cloud, e-commerce, and remote-work offerings thrived. Investors piled into these perceived safe-haven growth stocks, treating them as the new “must own” equities.

This led to a breadth divergence and by mid-2020, an equal-weighted S&P 500 index badly trailed the cap-weighted index, indicating most stocks were lagging the big winners.

This narrow leadership, much like 2015, resolved by broadening rather than crashing – at least in the near term. As 2020 progressed, news of health resolutions and economic reopening in late fall catalyzed a rotation. Lagging sectors like small-caps, cyclicals, and travel stocks began to surge, narrowing the performance gap. The S&P 500 continued to rally.

Over the 6 months after mid-2020, the index climbed further to new highs. Within 12 months, by mid-2021, the S&P 500 was up dramatically by over +30% from mid-2020 levels as virtually all sectors participated in the recovery.

Even on a two-year view from mid-2020 to mid-2022, and in spite of a correction in early 2022, the S&P 500 delivered a positive return. This outcome aligns with historical examples like 1980 when a narrow rally accompanied an early-cycle recovery that transitions into a broader bull.

Indeed, 1980 and 2020 are cited as instances where the rest of the market “strengthened and caught up to the early leaders, broadening out breadth and adding another leg to the rally”, with the S&P 500 moving meaningfully higher over the next year.

In some cases in the early ’70s, 2000, 2007, narrow leadership preceded significant downturns as the overextended leaders fell to earth.

In other cases, such as 1980, 2015, 2020, narrow rallies broadened and the bull market continued. Much depended on valuations and the macroeconomic shift at the time of concentration. Below, we quantify the S&P 500’s performance following several of these peak concentration episodes:

S&P 500 Performance After Major Concentration Peaks

To evaluate the market’s trajectory after these concentration events, we measure the S&P 500’s price return and total return (including dividends) in the 6-month, 12-month, and 2-year periods following the peak of each narrow-leadership phase. The table below summarizes the outcomes for key historical instances:

Concentration Event (Peak Date)	6-Month S&P 500 Price (Total)	12-Month S&P 500 Price (Total)	2-Year S&P 500 Price (Total)
Jan 1973 – Nifty Fifty peak	–15% (≈–13%) ▼	–25% (≈–22%) ▼	–40% (≈–35%) ▼
Mar 2000 – Dot-Com bubble peak	–8% (≈–7%) ▼	–20% (≈–18%) ▼	–25% (≈–23%) ▼
Oct 2007 – Pre-GFC peak	–10% (≈–9%) ▼	–35% (≈–33%) ▼	–30% (≈–27%) ▼
Dec 2015 – FANG narrow rally	+3% (≈+4%) ▲	+9% (≈+12%) ▲	+31% (≈+36%) ▲
Aug 2020 – Pandemic tech surge	+12% (≈+13%) ▲	+30% (≈+33%) ▲	+18% (≈+21%) ▲

Note: Price returns are approximate. Total returns include reinvested dividends (yield ~2% historically). Arrows indicate direction (▲ gain, ▼ loss). “Peak date” is when concentration/narrow breadth was at its height; subsequent returns are measured from that point forward.

The data illustrate a mixed bag. The early 1973, 2000, and 2007 peaks led to significant losses in the following 1–2 years. Each of those instances coincided with the end of an economic cycle and an asset bubble or crisis, stagflation in 1973–74, dot-com bust in 2000–2002, and the financial crisis in 2008.

Notably, the S&P 500’s two-year total return after the 1973 and 2000 peaks was deeply negative, around –35% and –23% respectively, reflecting the severity of those bear markets.

In contrast, the 2015 and 2020 peaks were followed by solid gains when the index rose in the double digits over the next year and was markedly higher two years out. These recent cases occurred during ongoing economic expansions, or rapid recoveries, with supportive policy, allowing the market rally to broaden rather than implode.

Another way to put these outcomes in context: historically, sharply narrow breadth has often preceded below-average forward returns and bigger drawdowns but not always.

As the Morgan Stanley research in 2020 noted, such narrow rallies can persist for a while. In the late ’98–2000 narrow market lasted 27 months and eventually resolve either by the leaders “catching down”, a correction in the leaders or laggards “catching.

The table above shows both patterns. For example, 1972’s and 1999’s leaders ultimately “caught down” via crashes, whereas 2015’s and 2020’s leaders saw the rest of the market catch up. In six of nine historical instances of extremely narrow breadth since 1970, the S&P 500 was actually higher 6 months, suggesting that narrow leadership alone isn’t a guaranteed sell signal. However, when combined with macro stress, like looming recession, narrow breadth can be a warning sign.

Sector Dominance in Each Period

Each concentration episode had a distinct sector flavor:

The early 1970s were dominated by large-cap growth across industries. Key players were in Technology (IBM, Kodak), Consumer Staples (Coca-Cola, Avon), Healthcare (Johnson & Johnson), and Conglomerates/Industrials (GE, 3M).

These were the “blue-chip” growth names. Their common trait was high valuation and investor euphoria, rather than a single sector.

The late 1990s was overwhelmingly dominated by technology and telecom. The Tech sector led the market by a wide margin with software, hardware, and networking companies all featuring as top performers.

The S&P 500’s technology weighting ballooned as companies like Microsoft, Intel, Cisco, Oracle, and WorldCom surged.

Telecommunications/Media, such as AT&T, Lucent, AOL also boomed with the internet craze. Old-economy sectors  like industrials, utilities, materials were left behind.

By 2007, leadership narrowed to Energy/Materials and a few global growth stories. Energy was the standout – record oil and commodity prices drove oil producers and mining companies higher. Emerging markets-related stocks and agriculture e.g., fertilizer companies also did well.

Meanwhile, the huge Financials sector quietly started sinking due to the credit issues, which meant the apparent market strength rested on a smaller group of winners such as oil and resource stocks. By early 2008, energy was almost the only sector in the green while most others turned down.

In 2015, the Technology and Consumer Discretionary sectors, including internet and retail, dominated. In sector terms, this was primarily the tech sector. Google and Facebook were technically in Tech at that time; Amazon and Netflix in Consumer Discretionary.

Together these “new economy” stocks vastly outperformed sectors like Energy, which was crashing with oil prices in 2015 or Industrials. So the sector leadership was concentrated in areas tied to digital advertising, e-commerce, and streaming media.

By 2020 once again, Information Technology, including Apple, Microsoft, Nvidia, along with Communication Services (Google/Alphabet, Facebook) and parts of Consumer Discretionary (Amazon, Tesla), were the clear leaders.

In fact, by mid-2020 just seven tech-oriented stocks, called the “Magnificent Seven” accounted for virtually all of the S&P’s gains. Sectors like Utilities, Real Estate, Financials, Energy lagged far behind during the initial rebound.

Essentially, the 2020 era rally was a Silicon Valley story. It’s worth noting these sector labels blur because Amazon is consumer discretionary but behaved like a tech stock. The unifying theme was big tech and online-focused businesses driving the market.

Modern Market Implications and Insights for Traders

As of now, many observers note that we are again in a period of extreme market concentration. In 2023, the S&P 500’s gains have been powered largely by a handful of mega-cap tech stocks, often the same group from 2020.

The so-called “Magnificent Seven” including Apple, Microsoft, Amazon, Alphabet/Google, Meta, Nvidia, and Tesla have contributed the majority of this year’s returns. Breadth was very narrow in early 2023, with equal-weighted indexes far underperforming.

By mid-year, Apple and Microsoft alone made up about 14% of the S&P 500, and the top 5 stocks around 25%, levels of weighting not seen in decades.

In fact, at the end of 2023 the top 10 stocks comprised ~27% of the index, approaching the record set in the early. This raises the question: What does history tell us about what comes next, and what should retail traders consider?

Roughly half of past narrow-leadership episodes resolved with a market correction (1970s, 2000, 2008), and half resolved with continued gains as breadth improved (1980, 2016, 2020). Narrow breadth itself is not a definitive sell signal.

For example, 2023’s rally being top-heavy in tech doesn’t automatically mean an imminent crash and 2017’s rally, for instance, started narrow in 2015 and then broadened.

Historical research by Ned Davis Research found no consistent evidence that narrow breadth “kills” bull markets. Retail traders will likely do best by avoiding knee-jerk bearishness solely because only a few stocks are leading. However, it’s still worth monitoring whether breadth is improving or worsening over time, as that can signal the rally’s health.

Past concentration peaks that preceded bad outcomes tended to coincide with deteriorating economic or monetary conditions such as the Fed tightening aggressively (1973, 2000, 2007) or external shocks.

In 2023, the Fed has raised rates sharply, and any sign of economic downturn has the potential to challenge high-valuation leaders. On the other hand, if the economy avoids recession and rates stabilize, we very well may see laggard sectors, such as small caps and industrials, join the rally, similar to 2020’s pattern.

Traders need to keep an eye on macro indicators, such as inflation, rate trajectory, earnings growth. A narrow rally during an expansion can persist, but a narrow rally on the cusp of a recession is more precarious.

Today’s market darlings, like big tech/AI stocks, are expensive relative to the market, though not as wildly inflated as the dot-com era in terms of business fundamentals. Many of these firms have good earnings and cash flows. This is a critical difference from 1999, when many top performers had no profits.

That said, current forward P/Es for the top stocks are significantly higher by about 40% higher than the S&P 500 average. If the catalysts driving them, AI growth and cloud demand, slows, payback could be harsh.

Retail traders must be wary of overpaying for hype. It’s worth recalling that in the Nifty Fifty era, even great companies became poor investments when bought at extreme prices.

A market levitated by a few names is vulnerable if anything trips those leaders. Any earnings disappointment, regulatory action, or shift in consumer trends affecting a mega-cap stock could have an outsized impact. As one portfolio manager noted, we’re “at a historic extreme in the amount of money in a very small number of stocks,” which means if those falter, the index can drop swiftly.

Traders on average do best by managing risk through diversification. If your portfolio is heavily concentrated in the current winners, consider that even excellent companies can see stock price corrections (e.g., a superstar like Tesla fell over 20% in 2023 amid this otherwise strong tech. Balancing exposure across sectors and asset classes can cushion against a sharp rotation out of the leaders.

The flip side of concentration is that many stocks outside the favored few may be undervalued or overlooked. History shows that when breadth eventually broadens, those laggards can rally strongly. For instance, in 2016–2017, financials, industrials, and international stocks had huge runs after underperforming in 2015.

In late 2020 into 2021, small-cap value stocks skyrocketed after lagging the megacaps. Retail traders would do well to look for high-quality companies in out-of-favor sectors that could play “catch-up” if conditions normalize.

A narrow market can present a chance to rotate into neglected areas before the rest of the crowd, provided you have conviction that a broader economic recovery is coming. Essentially, diversification and looking beyond the popular names can position a portfolio for when leadership eventually rotates.

Perhaps the most important takeaway is not to get swept up in euphoria or panic. In concentrated markets, headlines often fixate on the winners. It’s easy for traders to feel FOMO and pile into the hottest stocks at lofty prices. While momentum can be profitable, remember the lessons of past eras like the Nifty Fifty and dot-com periods– trees don’t grow to the sky.

On the other hand, shorting or abandoning the market just because breadth is narrow can mean missing further upside as in 2015–2016 or 2020.

A balanced approach is key. Use stop-loss orders or hedges if you have outsized exposure to a few names, and keep an eye on breadth indicators, like how many stocks are making new highs, or the ratio of equal-weight to cap-weight index performance.

If breadth starts to improve, it could signal a healthier rally – if it deteriorates further while valuations climb, caution is warranted.

As Morgan Stanley’s analysts put it, extreme concentration makes it hard for active stock-pickers to beat the index, but it doesn’t last forever. Eventually, competition and mean-reversion kick in, either via new challengers emerging or via investors rotating.

Today’s market concentration in mega-cap tech is historically high and cannot be ignored. The top five S&P 500 stocks now rival the dominance last seen in the early 2000s and just seven stocks have driven a huge portion of returns.

History offers two playbooks: one where such narrow leadership cracks and drags the market down, and another where the rest of the market catches fire and lifts the averages higher. For retail traders, the prudent course is to respect the market’s momentum and don’t bet against the trend prematurely, but also prepare for possible regime change.

Ensure your portfolio isn’t overly concentrated in a few names or a single sector and diversify across sectors and styles so that you can participate if breadth broadens, and be protected if the leaders stumble.