Behind the repeated record highs of the S&P 500, only a small number of stocks are driving the rally! The upward trend in U.S. stocks may be difficult to sustain.

With the recent continuous refresh of historical highs in the S&P 500 index, the number of stocks hitting new highs in the market is very small, which is not a good sign for traders who are concerned that the market is increasingly focused on a few large tech stocks. Oppenheimer's analysis shows that while the S&P 500 index has repeatedly hit new highs, the number of companies hitting new highs on the New York Stock Exchange is only 88 more than those hitting new lows. This "narrow market breadth" has traditionally been seen as a sign of market weakness. Historical data shows that since 1972, when the S&P 500 breaks new highs and the difference in the number of companies hitting new highs and new lows is less than 100, the returns in the following 12 months are often below average. Technical chart observers have long been concerned. The current rebound in the US stock market is mainly driven by large tech stocks, indicating that investors tend to adopt a conservative strategy in the face of US trade policy uncertainty and fiscal concerns. According to analysts Gina Martin Adams and Gillian Wolff, the so-called "Fab Seven" index has risen 36% since the April low, while the S&P 500 index has only risen 25% during the same period. Meanwhile, only 10% of the S&P 500 index constituent stocks are driving the index higher, far below the average of 22% from 2010 to 2014. Oppenheimer's senior analyst Ari Wald said, "Broader market participation is very important. If the uptrend can gain comprehensive participation from both large-cap and small-cap stocks, it is usually more sustainable." Another sign of low market participation comes from the equal-weighted index such as the S&P 500, which has not hit a new high since November 29 last year. Independent market strategist Jim Paulsen pointed out, "I originally thought that, starting from the market low point and experiencing such a strong rise, there would be a more comprehensive uptrend." Mixed signals After two months of rapid rebound, traders are facing a series of conflicting market signals. On one hand, the US economy remains strong despite tariff uncertainties, inflation remains under control, and risk-takers have benefited from both large tech stocks and more speculative market sectors. But the shadow of a trade war remains. US President Trump began announcing new tariff plans on Monday, imposing tariffs on countries like Japan, South Korea, and South Africa starting from August 1. The "narrow market breadth" has been a recurring feature in the past 32 months of the bull market, causing concerns that the impact of a few stocks on the S&P 500 index may be too large. Jim Paulsen believes that if the Federal Reserve really starts cutting interest rates in the coming months, it could be a catalyst for improving market breadth. He said, "Many positive forces that should benefit the stock market are currently being suppressed by the unusually tight policies of the Fed, and I believe they are on the verge of changing this situation." At the same time, Oppenheimer's senior analyst Ari Wald also sees bright spots in the recent performance of small-cap stocks - the Russell 2000 index has recently regained its 200-day moving average. But he added, "If the performance of small-cap stocks weakens again and erases the recent gains, it will indicate that this uptrend may be losing momentum and setting the stage for seasonal volatility in the late third quarter."