Goldman issues warning about the stock market comeback because of its reliance on just a few stocks

Published Mon, Apr 27 20208:35 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

( This story is for CNBC Pro subscribers only ). The stock market's heavy concentration in a few tech giants could hold it back from rebounding to its February highs, according to a new note from Goldman Sachs . The relative size at the top of the S & P 500 has risen to a multi-decade high after several mega-cap stocks outperformed the rest of the market during the coronavirus crisis, and it will be difficult for the index to rise further without more help from the other stocks, Goldman said. "The further market concentration rises, the harder it will be for the S & P 500 index to keep rising without more broad-based participation," the note said. The five largest stocks in the S & P 500 — Microsoft , Apple , Amazon , Alphabet and Facebook — account for 20% of the total market cap in the index. In March 2000, near the peak of the tech bubble, the top five companies made up 18% of the indexes market cap, Goldman said. The index has rebounded to about 17% below its February high, but the median stock in the index is still 28% below its recent high. Without broader participation, the market hasn't been able to sustain rallies historically, Goldman analysis shows. "Narrow breadth can last for extended periods, but past episodes have signaled below-average market returns and eventual momentum reversals," the note said. In other periods with similarly weak market breadth, the median length was for 3 months, while it lasted for more than two years during the tech bubble, the note said. However, eventually the gap closed, either from the leaders falling back or the rest of the market catching up. "In both cases, on a relative basis the outperformance of market leaders eventually gives way to underperformance," the note said. Historically, narrow market breadth have often been a sign that a signficant drawdown was around the corner. In addition to the tech bubble, the S & P 500 become more concentrated in a few big stocks right before the 1990 and 2008 recessions, the note said. Goldman isn't alone in saying that the current concentration can't last forever. Morgan Stanley strategist Michael Wilson wrote in a note to clients that as the market gets a better since for how the economic recovery will take shape, the gap will close. "Once downward earnings revisions begin to recover, this cohort is unlikely to enjoy the same upward momentum from its higher base and that shift should unwind some of the market cap concentration," Wilson said in the note. — CNBC's Michael Bloom contributed to this story.

A person walks at the Wall Street subway stop in New York City.

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(This story is for CNBC Pro subscribers only).

The stock market's heavy concentration in a few tech giants could hold it back from rebounding to its February highs, according to a new note from Goldman Sachs.