After another year of strong performance for US markets, there is increasing chatter regarding what will lead to its demise. This is just how markets work – the more they go up, the more participants look for reasons they will soon go down.

One common refrain from bears (ie: those betting the market will decline) is the narrowing of the market this year – or a lack of market breadth. Market breadth refers to how many stocks are participating in a given move in an index or stock exchange.

Strong participation (or high market breadth) is commonly believed to be a good sign for markets – if more companies are participating in an uptrend, doesn’t that make the trend more likely to continue? And said another way, if markets are rising with low market breadth, isn’t that a sign that momentum may soon fade (as only a few companies are holding up the positive trendline?)

I am the first to admit that when I’ve read these headlines (and conclusions) concerning market breadth in the past, they have sounded rather reasonable. However, an analysis I read this week from Natixis sheds different light on this debate. As the drumbeat of “low breadth = market’s in trouble” has picked up as of late, I believe it’s worth looking at this thoughtful counterargument.

What is Market Breadth?

There are several ways to measure market breadth (new highs vs new lows, percentage of companies above 50 or 200 day moving average, advancing vs declining)- and this is part of the issue. With so many available indicators, it allows you to first decide on a conclusion and then find an indicator to confirm it.

Breadth & Sentiment – Closely Related

Natixis makes the case that breadth is not necessarily a sign of stable or unstable gains for indexes. Rather, breadth appears to be a broader indicator of sentiment and risk appetite. Look at 2023 – a time when the market also had very narrow breadth. Markets were fresh off 2022 lows and the consensus was “proceed with extreme caution” given concerns that the Fed was going to tank the economy with further rate hikes in the face of runaway inflation. As markets kept rising in face of these fears, investors tepidly put cash to work in the areas they knew and trusted (large cap tech) instead of investing broadly across all areas of the market. This led to narrow breadth.

A similar pattern emerged in 2024. There was a flurry of concerns over US economic growth (with a weakening labor market). With this lower sentiment, investors once again first turned to the trade that had worked – large cap tech.

In both cases, as sentiment improved, breadth rose to catch up with price (not the other way around). As markets trend higher (even if on the backs of a few names), investor confidence and sentiment rise and increase investor willingness to invest more broadly and seek value in all parts of the market. Sentiment up = Breadth up.

Breadth in 2025

What’s happening in 2025? Once again, there is chatter about low breadth. Yes, the market cap weighted S&P 500 index has surged higher on the back of technology (namely the AI trade). However, with small caps and equal weighted indexes also near all-time highs, there is clearly decent breadth. Markets in 2025 are not narrow (when a small percentage of names rise in a rising but). Rather, they are top heavy (top weighted names are generating the highest returns).

Look at the numbers: The Mag 7 are up nearly 25% on the year after recovering from a nearly 30% drawdown at the April lows. But the S&P 493 is up 12% after digging out of a 16% hole – both strong results and evidence of decent breadth.

However, the disparity is growing in recent months – through August 21, the Mag 7 and equal-weighted S&P 500 were pretty even for the year. Since then, the Mag 7 are up over 14%, even after pulling back from the recent highs pushing the S&P 500 up almost 6%, while the equal-weighted version has returned a negligible 50 basis points (bps).

Natixis acknowledges that these disparate moves in a short amount of time are concerning. However, it seems like once again, it’s a matter of investors sticking with what’s worked. As US equity markets have exceeded virtually every expectation this year, many money managers and investors are under exposed and may be chasing returns to meet benchmarks by year end. Further, with some weakness exposing itself in parts of the market (slowing cyclical areas like housing, restaurants, etc), investors are betting on what’s worked (AI/big tech). As consensus and sentiment improve, breadth should follow.

So What?

What’s the takeaway from all of this? I view it as a warning to be wary of “broad brush” headlines warning you the end is near due to market breadth alone. The actual situation is far more nuanced. Here are some highlights to keep in mind:

*A top heavy market is not the same as a narrow market. Narrow suggests a lack of upside participation for most companies in a rising market. That is just not the case in 2025

*Breadth has been pretty good in 2025. It’s weakening in the past month – but overall, it’s healthy. In recent weeks as tech and AI have pulled back (tech down 6%, Mag 7 down 4%), the equal weight S&P 500 is down just 1.2%

*There is no proven correlation between low market breadth and weaker future returns. Breadth is not a valuable predictor for markets

*Typically, as markets grind higher, breadth rises to catch up. It’s the classic “fear of missing out” trade and it has been a constant in markets. You can’t outrun or outthink human nature

*AI theme could very well dominate for a while longer. However, if markets keep climbing and economic backdrop improves (inflation cools, labor market cools but doesn’t collapse, Fed cuts rates to prop up labor markets), investor sentiment is likely to rise and breadth will follow. Said another way, there are investment opportunities beyond AI trade

*Top heavy risks are not to be ignored. Outperformance in concentrated names have propelled the index higher but a negative turn in those names will have the same impact – just in reverse. Now is a great time to take a close look at your portfolio and ensure its characteristics (including but not limited to breadth and concentrations) matches your risk tolerance and future return objectives

In sum, there is plenty to worry about as an investor in today’s US equity markets but a (supposed) lack of breadth really shouldn’t be one of them.

Onward we go,