The recent performance of the S&P 500 has raised concerns about the market outlook for 2025. While the index remains relatively close to its record high, a deeper dive into market internals reveals a concerning trend: declining market breadth. Hyperloop Capital Insights examines this critical indicator and its potential implications for investors.
Bart Sadowski/Shutterstock – Stock market graph indicating a downward trend.
The Federal Reserve’s recent hawkish forecast for interest rate cuts in 2025 contributed to the market’s worst week since March 2023. However, underlying issues predate the Fed’s announcement. A key indicator, the advance-decline line for the S&P 500, has flashed a warning signal.
For 14 consecutive days, the number of declining stocks in the S&P 500 has surpassed the number of advancing stocks. This negative breadth divergence suggests weakening participation in market rallies and potential trouble ahead. The equal-weighted S&P 500, down 7% from its record high, further underscores this point.
According to Ned Davis Research (NDR), this 14-day losing streak in the advance-decline line marks the worst performance since October 1978. Historically, 10-day or longer losing streaks in this indicator have correlated with lackluster future returns for the S&P 500.
Graph illustrating S&P 500 performance following periods of negative breadth.
NDR’s analysis reveals that following such streaks, the S&P 500 has averaged a six-month forward return of just 0.1%, significantly below the typical 4.5% average gain. While limited historical occurrences prevent definitive conclusions, this pattern warrants attention. Market tops often begin with breadth divergences, where major indices advance despite weak participation from individual stocks.
The upcoming Santa Claus rally period will provide a crucial test for the market. A failure to rally during this historically bullish season could exacerbate existing breadth divergences and further darken the outlook for 2025.
Adding to the concern is the prevailing investor sentiment. NDR’s crowd sentiment poll indicates excessive optimism, reaching its seventh-longest stretch in this zone since 1995. Such extended periods of optimism can lead to sharp reversals, potentially impacting market performance.
Chart depicting investor sentiment levels over time.
Continued weakness in the market, particularly in breadth indicators, suggests a potentially challenging 2025 for investors. The ability of the market to rectify these divergences in the coming weeks will be crucial in determining the validity of these concerns. A failure to do so may signal the realization of a more difficult investment environment in the coming year. Hyperloop Capital Insights will continue to monitor these critical indicators and provide timely analysis to inform investment strategies.
