The stock market may be near all-time highs, helped by the Magnificent Seven, but a look under the hood is showing some troubling breadth patterns. The S & P 500 soared more than 10% in April, its best month going back to November 2020, as strong earnings from the Magnificent Seven companies once again revived investors' risk appetite. The Roundhill Magnificent Seven ETF (MAGS) ended last month up by more than 14%. The broad market index also reached a fresh high and closed at a record on Friday. But take a look at the Invesco S & P 500 Equal Weight ETF (RSP) , which was higher by just 6% last month, and lagged the other measures. The ETF tracks the equal-weighted S & P 500 which, unlike the market cap weighted benchmark, gives every company in the index the same exact allocation — thereby giving investors a more accurate portrayal of the health of the overall market. "It speaks to how narrow this market has once again become, led by a small group of high-flying momentum names," Wolfe Research's Rob Ginsberg wrote over the weekend. RSP 1D mountain RSP, 1-day Technology was once again the best-performing sector, with the Technology Select Sector SPDR Fund (XLK) higher by 20% in April, Ginsberg pointed out. That was followed by real estate , by a large margin, up just over 8%, he also noted. Think also of consumer discretionary, with the State Street Consumer Discretionary Select Sector SPDR ETF (XLY) also having rallied more than 8% last month, but Amazon — accounting for roughly 30% of the sector — has been doing the heavy lifting, Ginsberg wrote. In comparison, the Invesco S & P 500 Equal Weight Consumer Discretionary ETF (RSPD) fell behind. "While the two rallied together at first, the past week has told a different story with a divergence now growing," Ginsberg wrote. "It's nothing worth flipping your portfolio to cash over obviously, but it is another sign that things aren't as strong as they seem on the surface." It's worrisome that the broader market is relying again on just a handful of names for its advance, because it raises the risk of a sharp selloff if momentum fails. Earlier this year, the expanding breadth of the market was a key reason investors believed in the strength of the rally, because of the underlying health. But now, it looks like the Mag Seven will once again be the main driver of any near-term gains. A note Monday from JPMorgan's trading desk showed that earnings for the megacap tech names are outperforming the other 493 stocks by roughly 42%. Tech leadership could mean the U.S. will once again outperform the rest of the world, according to the note. But there remains no shortage of risks, including the potential for AI disruption, and the raised inflation risk from the ongoing blockage of the Strait of Hormuz that could hurt the economic outlook. Adding to those concerns is the seasonal risk, given that May usually marks the start of the worst six months of trading for the market. For now, however, investors appear happy to look past those risks. Ginsberg said: "Like most divergences though, it doesn't matter until it does, and for now… they don't matter."
