Too much hot money is concentrated in surging FAANG stocks, and it may be about to end badly for investors. 

Facebook's (FB) post second quarter earnings meltdown has shed light on increasingly narrow market breadth -- an often negative development for stocks -- explains Goldman Sachs strategist David Kostin. Narrowing breadth has been masked by the out-sized appetite for tech stocks such as Facebook and Netflix (NFLX) . The top 10 contributors in the S&P 500 have accounted for 62% of the S&P 500's 7% year to date return. Of these 10 stocks, nine are tech or internet firms. The tech sector alone accounts for 56% of the S&P 500's year to date return, or 76% including Amazon (AMZN) and Netflix. 

"In the past, sharp declines in breadth have signaled below-average 1-, 3-, and 6-month returns for the S&P 500 as well as larger-than average prospective drawdowns," says Kostin. "From a fundamental perspective, narrow market leadership typically reflects narrow earnings strength, which is often a symptom of a weakening operating." 


"In addition to the well-known episode of narrow breadth during the Tech Bubble, previous narrow breadth markets occurred ahead of the recessions in 1990 and 2008 as well as the non-recessionary economic slowdowns of 2011 and 2016. In the past, most instances of rising market cap concentration among a handful of stocks corresponded with an increase in earnings concentration as well. Usually, these narrow bull markets eventually led to large drawdowns when investors lost confidence in the increasingly expensive handful of crowded market leaders." -David Kostin

Relative to history, the recent narrowing of market breadth has not been sharp enough to trigger alarm, Kostin says. 

Hardly confidence inspiring. 

Source: Goldman Sachs.
Source: Goldman Sachs.

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