….Or should I say lack of breadth. While the market indices have recently hit all-time highs, the underlying breadth of the market may be telling a different story.
Stock market breadth measures the health of a market by counting how many individual stocks are participating in a price move, rather than just looking at the index as a whole.
Think of it this way, with most of the returns largely driven by AI related companies, semiconductors, and hyperscale’s indicates lackluster participation by most of the index’s members. Historically, this type of limited participation has often preceded periods of correction or drawdown in prices.
“Weak cumulative breadth lines have tracked with the three-headed monster (crude prices, the dollar, and rates), suggesting that high energy prices, rising rates, and a strengthening dollar are weighing on equities” Bespoke Research
While stocks are not cheap, there is an argument (in my opinion a slight one) that with all this new AI technology and three of the largest IPOs in history coming out this year, that this party can continue. We are not at dot-com or financial crisis valuations, yet we are not that far off. On a price-to-sale basis, current ratio is 3.3, above the historical average of 1.8, but still below the 4.0 multiple reached at the peak of dot-com era.
This is more technical than my usual 50,000 feet view but it is important to know where we are and how you may want to think about diversification over the next 12-18 months.
The 3 things to watch closely, inflation, interest rates, and earnings quality.
Consumer prices rose 3.8% annual rate in April. Wholesale inflation increased 6% year-over-year in April which was the biggest jump since 2022. To combat this, financial conditions have tightened, with the 30-year Treasury yield reaching 5.19%, its highest level since the financial crisis.
Though I am not an economist, one-way markets adjust or correct high inflation and inflated asset prices is through tighter credit conditions. Higher interest rates (cost of borrowing) reduce demand and profit margins. Lower demand helps bring down inflation, and asset prices adjust accordingly.
So, given all of this, what steps can we take to be proactive or even opportunistic?
- Look for value in both asset classes and industry groups. Some valuations on Mid and Small cap companies, value stocks, healthcare, financials, and especially international. International markets significantly outperformed the U.S. in 2025, and in 2026 are not far behind the S&P 500 performance. Those markets have less exposure to tech and AI, which can provide a buffer in the event of a correction in those names. Recent gains have also been supported by progress on trade agreements between the EU and the U.S. (Tariffs)
- Take profits where appropriate. Consider trimming some of your biggest winners if they are becoming concentrated (maybe 5 -10% of your portfolio). Do that in retirement accounts first to defer taxes, but don’t be afraid to pay some Capital Gains taxes near an all-time market high. That will feel good if we do see a down year or two in the markets.
- Update your financial plan. Finally, act on the one or two items you’ve been putting off- updating wills and trusts, reviewing tax returns, contribution to a Roth at work (no income limits), holding a family financial meeting so everyone knows where you are and what their roles may be. Consolidating that 401k from 3 jobs ago into your IRA.
At Campus Private Wealth, we always begin with your goals and situation and work to help you achieve them in the most comfortable and informative way possible.
Hope everyone has a great Memorial Day Weekend, and we look forward to seeing you at our upcoming Speaker Series on June 10th.
Best,
Bill
