Regardless of how long you've been investing, the pace of change on Wall Street is something to marvel at. In 2021, the ageless Dow Jones Industrial Average (^DJI 0.73%), benchmark S&P 500 (^GSPC 1.18%), and growth-focused Nasdaq Composite (^IXIC 1.52%) were regularly notching off new all-time closing highs. Just one year later, in 2022, all three indexes were mired in a bear market and delivering their worst full-year returns since the global financial crisis.

This year, the script has flipped, once more. Though the Dow, which outperformed the two other major stock indexes in 2022, is effectively flat on a year-to-date basis, through May 29, the S&P 500 and Nasdaq Composite have surged 9.5% and 24%, respectively.

It would seem the bulls are, once again, running wild -- but looks can be deceiving.

A twenty dollar bill paper airplane that's crashed and crumpled into the business section of a newspaper.

Image source: Getty Images.

Breadth for Wall Street's benchmark stock index is potentially worrisome

For months, I've looked at a broad assortment of stock market indicators, financial metrics, and valuation tools to offer insight as to where stocks may head next. Even though there's no such thing as a foolproof indicator, history has a way of repeating itself on Wall Street, and these indicators and metrics have the potential to give investors who follow them a leg up.

With the S&P 500 hitting a nine-month high this past week, it would appear the worst of the 2022 bear market is over. However, a closer look at the breadth within the S&P 500 reveals a different story.

During a true bull market, we typically see a wide assortment of stocks take part in the upside. This means large-cap, mid-cap, and small-cap stocks from most sectors and industries are going to be rallying. But as you can see in the tweet below from Michael Kantro, the Chief Marketing Strategist at Piper Sandler, the S&P 500 seems to have a clear breadth problem. 

Based on recent data, approximately 20% of the S&P 500's components are beating the index on a trailing-three-month basis. The last time such a small percentage of S&P 500 stocks were outperforming the broad-based index was March 2000. Not coincidentally, the S&P 500's closing high prior to the dot-com bubble bursting was set on March 24, 2000.

Since the S&P 500 is a market-cap-weighted index, bigger businesses are going to have more influence. The nine largest components of the S&P 500 (including companies with multiple stock classes) are: 

  • Apple (AAPL 0.35%): 7.39% weighting
  • Microsoft (MSFT 1.58%): 6.97% weighting
  • Amazon (AMZN 0.74%): 2.95% weighting
  • Nvidia (NVDA 3.10%): 2.68% weighting
  • Alphabet Class A shares (GOOGL 1.48%): 2.11% weighting
  • Alphabet Class C shares (GOOG 1.43%): 1.86% weighting
  • Berkshire Hathaway Class B shares (BRK.B -0.20%): 1.65% weighting
  • Meta Platforms (META 2.73%): 1.62% weighting
  • Tesla (TSLA 2.10%): 1.43% weighting

Collectively, 28.66% of the point movements in the S&P 500 are being determined by just eight brand-name businesses. Keeping in mind that the S&P 500 is up by 9.5% year to date, here's how the index's largest components have fared since the start of 2023:

AAPL Chart

AAPL data by YCharts.

With the exception of Berkshire Hathaway's Class B shares, the other growth-focused companies listed above have been off to the races since 2023 began. Nvidia has been powered by artificial intelligence (AI) euphoria and is up 167%, while investors have flocked to the social media dominance offered by Meta, whose stock has also more than doubled. Tesla, Amazon, Alphabet's two classes of shares, Microsoft, and Apple aren't slouches, either, and have handily outperformed the benchmark index.

While having a small number of stocks lead the market higher isn't, in itself, a telltale sign of bad things to come for Wall Street, history suggests it's generally not good news when a small group of stocks is leading while the majority of publicly traded companies are lagging. It paints a picture of strength that masks broad-based market weakness.

Market breadth is meaningless if you use time as an ally

Although the S&P 500 displaying an ominous breadth warning not seen in 23 years may represent a coming top in the broad-based index, this isn't something to worry about if you're an investor with a long-term mindset.

To be fair, the dot-com bubble top in 2000 and bear market that followed weren't pleasant. The S&P 500 shed nearly half of its value over more than two years, and the Nasdaq Composite was hit even harder.

But like every other stock market crash, correction, and bear market that came before it, index-based declines tied to the dot-com bubble were eventually put behind us. In fact, with the exception of the current bear market, every single double-digit percentage decline in the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite has eventually been wiped away by a bull market.

A businessperson who's smirking and looking off to their left while holding a financial newspaper in their hands.

Image source: Getty Images.

To add to the above, no indicator has been a greater ally to investors over the past century than time. Market analytics company Crestmont Research examined the effects of time on investors by tabulating the total returns, including dividends, an investor would have netted if they'd purchased an S&P 500 tracking index and held that position for 20 years. Crestmont backdated its analysis to 1900, which gave it 104 years of rolling 20-year return data (1919 through 2022) to sift through.

Here's the kicker: All 104 rolling 20-year periods produced a positive total return. In other words, it literally didn't matter when you bought into an S&P 500 tracking index since 1900. As long as you held that position for 20 years, you generated a positive total return.

But that's not all. Whereas a small number of ending years led to an annualized total return of between 3% and 5%, more than half of these 104 ending years led to an annualized return over 20 years of between 9% and 17.1%. These are the sort of returns that can build serious wealth and trump other asset classes, such as bonds, housing, and commodities.

Timing the market in the short term can be a crapshoot. But time in the market over the long run is a proven wealth-building strategy. Even if poor S&P 500 market breadth serves as a warning of a possible near-term top in the major indexes, it's nothing that should concern investors who are using time as their ally.