It's back: A bad S&P 500 data point last seen at dot-com bust

The S&P 500 has a big performance issue that should be a focus for investors: Too much of the index return is coming from too few of its stocks.

The 10 most valuable companies in the market are up roughly 21.4 percent as a group this year, versus a loss of 2.6 percent for the rest of the stock market.

That 24 percentage-point spread between the biggest stocks and the index as a whole is the widest since 1999, heading into the dot-com bust.

"If narrow leadership stumbles, there's not much support," said S&P Capital IQ strategist Sam Stovall.

That leadership comes primarily from a few tech stocks.

Shares of Microsoft, Amazon.com, Alphabet and Facebook have led the way, while Johnson & Johnson, Berkshire Hathaway and ExxonMobil have turned in lackluster performance. The only non-tech stock to deliver among the biggest S&P 500 stocks is GE.

(Note to chart: These are the 10 largest stocks in the S&P 500 by market cap. Alphabet is No. 11 when ranked by index weighting. Source: S&P Capital IQ)

"A widening of the spread between the market's best performers and the rest of the market should be viewed as a cautionary sign," wrote Jason Trennert of Strategas Research Partners in a recent note to clients, citing research conducted by Strategas partner and chief technical analyst Chris Verrone.

The S&P 500 margin expansion story is as troubling. In the post-2009 bull market, half of the margin growth in the index has come from tech stocks — 69 companies out of the 500. And 20 percent has come from Apple alone, according to recent research from Goldman Sachs.

The data is critical for an investor's next steps, because the maxim to "Sell in May and go away" turned out to be prescient — with a flat market over the past six months — and now is when investors can make choices in time for winter months that typically lead upward moves in stocks, Stovall said.

Goldman Sachs strategist David Kostin wrote in a recent note that the moves in tech and Apple made sense because the industry, led by its most valuable company, was sharply improving profit margins, but that widening in margins is expected to slow down in the next year.

The problem with concentrated returns is that it convinces investors that stocks are less risky than they are, said Mitch Goldberg, president of ClientFirst Strategy, an advisory firm based in Boca Raton, Florida.

"This has been a year of mega-cap stocks because investors are feeling insecure and there's an element of safety in the brand names, but the big risk is the top 10 collapse, similar to 2000," Goldberg said. "As soon as momentum stops, the investors that came in late will decide to bail. And then it becomes a self-fulfilling prophecy of momentum that is as strong on the way down as on the way up.''

The big question is, what to do about it?

Goldberg advises clients to not wait too long to make a move on booking profits. "If you're up 50 percent and get out up 44 percent, no one will complain,'' he said. He advises use of limit orders as a way to force buying and selling discipline on stock investors.

"Just investing in the top 10 hasn't been a consistently successful strategy," he said.

Kostin predicts a "bifurcated market" in which the overall market will look flat but there will be clear gaps between high-performing consumer cyclical stocks focusing on U.S. markets and U.S.-based industrial companies hurt more by economic weakness in export markets.

But here's what really matters for investors: Goldman could only identify 28 companies in the S&P 500 that it thinks can continue to expand profit margins by at least 0.5 percentage points of sales in 2016 and 2017 — expanding margins is the key to growth in a sluggish global economy. And among the 10 stocks responsible for the huge spread in index returns this year, only Amazon and Alphabet make the cut. And despite the outlook for higher interest rates, which leads to expectations of better returns for bank stocks, not one financial services company is on the Goldman list.

Emerging profit-growth picks include Internet companies like Priceline Group, which has risen nearly 10 percent this year, and Web-travel rival TripAdvisor. Netflix, Starbucks and Time Warner round out Goldman's consumer picks.

Howard Silverblatt, senior index analyst at S&P, said the 24 percent return spread between the top 10 S&P 500 stocks and the rest of the index "is not a common occurrence." But he offered another way to view the data, which could provide some hope for stock pickers (though not as much for index fund investors).

The low index return, 0.23 percent year-to-date, is hiding the fact that 64 percent of the index has moved at least 10 percent year-to-date: 145 up and 178 down. It's also worth noting that valuations, while high, are not anywhere near the level of 1999 and 2000, when the return spread between the top 10 and the rest of the S&P 500 was 55 percent and 39.5 percent, respectively.

"There is definitely a sense of safety with a passive S&P 500 index investing strategy that is more fragile than they (investors) may realize due to the domination of just a few companies," Goldberg said. "By being selective, one can focus on growth names. ... Or, one may focus on picking the few diamonds in the rough within the lower 489 names. Or, one can employ both styles," he said.

— By Tim Mullaney, special to CNBC.com