The S&P 500 (^GSPC 1.18%) is in positive territory to kick off 2026. This would follow up on three consecutive years of double-digit gains for the index.
But this year's market isn't like the others.
The market of 2023-2025 was dominated by tech, growth, and the "Magnificent Seven" stocks. While these themes were enough to lift the major indexes, many other themes failed to keep pace with the overall index.
Image source: Getty Images.
This year has been different. Market breadth has improved considerably. The tech sector is still outperforming the S&P 500 by a small margin, but it's previously unloved areas of the market, including energy, materials, small-caps, and value stocks that are driving the gains.
Bull-market sustainability is generally more likely as more stocks participate. The last three years have shown that this isn't required, but greater participation generally means a healthier market. If that's true, the S&P 500 just got off to a historically good start to the year.
63% of S&P 500 stocks are outperforming the index
It's rare when more than 60% of stocks within the S&P 500 are outperforming the index, but we're there now with 63.2% of stocks outperforming the greater index. If that holds, it would be the second-highest full-year outperformance rate in more than 50 years, topped only by 2001.
Of course, we're talking about a month's performance here, and there's a lot that will happen between now and the end of the year. To gauge the true impact, we'll need to wait a while to see how the market performs.
But it's not too early to look at what's happened historically when a high number of stocks outperform the broader market.
High participation rates tend to correlate with recessions
High participation rates often come in multiyear chunks, but not always. The most recent high participation occurred in 2022. The S&P 500 was down more than 20% at times during the year, but that was largely due to megacap tech stocks, which accounted for a high concentration in the index and underperformed by a big margin. Many stocks fell less than the S&P 500, but defensive sectors and dividend stocks posted positive returns in some cases.
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Key Data Points
That instance of high participation coinciding with a bad market environment isn't the exception.
The early 1980s saw a period of above-average participation, but it also coincided with a recession that led to a 20% decline in the index. The early 1990s had a single good year in terms of breadth. It also coincided with a recession and a near-20% decline in stocks.
The early 2000s had a tech bubble. The late 2000s saw the financial crisis. You start to get the picture.
The fast start of 2026 doesn't mean a recession or bear market is coming. But history suggests there is some vulnerability there. But before we draw any conclusions, let's acknowledge that we're looking at one month of data. There's a long way to go and a lot of history yet to write.
