S&P 500 looks strong, but fewer and fewer stocks carry that strength

The S&P 500 is only about 0.2 percent below its all-time high. Yet below the surface, the average investor sees a completely different picture. No less than 41 percent of the shares within the index are more than 30 percent below their own record level.

Even more striking is that about 84 percent are at least 10 percent below the top and 17 percent even more than 50 percent below.

This difference arises because the S&P 500 weighs companies based on market value. As a result, the largest companies have much more influence than the rest.

Nvidia, Apple, and Microsoft together represent about one-fifth of the full index. So if those stocks continue to rise, the S&P 500 could set new records while hundreds of other companies are already deep in a correction.

The weakness is greatest in sectors that are sensitive to high interest rates. According to figures from The Kobeissi Letter:

• 97 percent of real estate companies at least 10 percent below the top
• 96 percent of materials shares
• 94 percent of utilities
• 92 percent of consumer shares

This is in line with the recent rise in US long-term interest rates to the highest level in 24 years.

According to Schwab strategist Kevin Gordon, the index is currently mainly maintained by stocks that benefit from AI investments.

The average S&P 500 component declined about 14 percent from top to bottom since the beginning of August. A Goldman Sachs index with no major AI profiteers rose just 6.7 percent over the past six months, up from 18.3 percent for the entire S&P 500.

This makes the coming quarterly figures extra important. If the largest technology companies continue to increase their investments and earnings growth, the index can remain strong.

But when one or more megacaps scales back their investment plans, it quickly becomes clear how narrow the current rally actually is. The S&P 500 looks strong, but fewer and fewer shares carry that strength.