S&P 500 breadth hits lowest level since dot-com bubble, Goldman says

Investing.com -- Goldman Sachs told clients in a note Monday that strength in AI stocks has kept the S&P 500 steady, but market breadth has fallen to its lowest level since the dot-com bubble.

Strategist Ben Snider said the median S&P 500 stock trades 16% below its 52-week high. Meanwhile, Goldman's sentiment indicator, which tracks how heavily U.S. equity investors are positioned in stocks, has fallen to -0.9, matching its March lows.

"Together, these factors indicate the potential for both broad market upside and a 'catch-up' from recent laggards if macro uncertainty declines," Snider wrote.

The S&P 500 has returned 14% so far this year. Even so, its forward P/E ratio has fallen from 22 times to 19 times, in line with its 10-year average.

Goldman said rising interest rates are one reason. The lower multiple also reflects investor concern that the AI spending boom is helping companies earn more than is sustainable.

According to the bank’s valuation model, the current multiple is consistent with a return on equity of 22%.

Snider explained that it is high by historical standards but 2 percentage points below the current level and shows the market is rightly skeptical that today's profitability will last.

The bank also said its long/short value strategy has returned more than 25% since the middle of last year. However, it expects that strategy to do less well from here.

"We believe investors should focus on generating alpha in stocks where they have differentiated views on long-term growth prospects," Snider wrote.

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