S&P 500 Market Breadth Hits Lowest Level Since Dot-Com Bubble, Goldman Sachs Finds

The S&P 500's rally is being propped up by a small number of artificial intelligence stocks, causing market breadth to fall to its lowest level since the dot-com bubble, according to a Monday note to clients from Goldman Sachs.

A Tale of Two Markets

While the S&P 500 has posted a 14% year-to-date return, the gains are highly concentrated. Goldman Sachs strategist Ben Snider noted that the median stock in the index is trading 16% below its 52-week high, indicating that the strength of the headline index masks underlying weakness across the majority of its constituents.

This divergence highlights investor focus on a narrow group of AI-related companies, while broader market participation remains tepid. The bank's sentiment indicator, which measures U.S. equity positioning, has fallen to -0.9, matching its lows from March.

Valuation and Sentiment

Despite the index's gains, its forward price-to-earnings (P/E) ratio has contracted from 22 times to 19 times, aligning with its 10-year average. Goldman Sachs attributes this decline to rising interest rates and investor skepticism about the sustainability of the AI-driven earnings boom.

Ad

According to the bank's valuation model, the current multiple implies a return on equity of 22%. Snider explained that this is two percentage points below the current level, suggesting "the market is rightly skeptical that today's profitability will last."

Investor Outlook

Goldman Sachs sees the current conditions as a potential setup for a shift in market dynamics. "These factors indicate the potential for both broad market upside and a 'catch-up' from recent laggards if macro uncertainty declines," Snider wrote.

While the firm's long/short value strategy has returned over 25% since mid-2025, strategists now expect it to perform less well going forward. Instead, Goldman advises clients to shift their focus. "We believe investors should focus on generating alpha in stocks where they have differentiated views on long-term growth prospects," Snider concluded.