An unusual bull or a disguised bear market?

With September behind us, the S&P500 is only one positive session away from setting a new all-time record high, but you wouldn't know if all you had were the statistics below the US share market's surface.

No fewer than 410 stocks (82%) out of those 500 are currently trading more than -10% below their own record high. 59% (295 stocks) are currently more than -20% below peak.

According to one particular technical definition, any asset trading -20% and more below its prior reference point is considered in a bear market.

Now that we mentioned technicals... 71% of S&P500 stocks are reportedly trading below their 50-days moving average, while 59% are trading below the 200-days moving average.

So, is this the most unusual bull market for equities, or what?

Is Market Concentration The Full Story?

What we do know is that market concentration around a new all-time record high has probably never been this narrow.

In other words, never before has such a small number of Winners pushed the index into uncharted territory while such a large part of the index is unable to contribute positively.

And yet, whether this setup is simply a reflection of today's changing world or the surest sign of a market bubble waiting to burst remains 100% up for debate.

For starters, the average percentage of US stocks that beats the S&P500 has been in steady decline for two decades now.

General outperformance occasionally rises as a result of sell-offs and temporary bear markets, but the underlying trend has steadily narrowed over that period, and accelerated yet again since the arrival of AI and technological disruption.

The fact that US indices are only carried by a small minority of strong outperformers is in itself nothing new.

Contrary to general perception, that has been the case for many years although, admittedly, it is currently approaching a new level of extreme.

But even before this month, the sheer volume of warnings about a bursting bubble on social media posts, through videos on YouTube and in mainstream financial publications has been nothing less than astronomical.

Here too, nothing's genuinely new. My social media feed has been rife with such warnings since 2024, and longer.

The most logical counter-argument is that corporate earnings growth has been exceptionally strong and concentrated too.

On forward-looking price earnings, the US share market is now cheaper than at the start of the year, indicating this year's gains have been all about higher margins and strong growth, not about rising valuations or expansion in PE multiples.

Extreme situations lead to extreme outcomes, such as this one:

Nvidia's market cap of US$5.4trn is nearly US$2trn higher than all of the companies in the Russell 2000 combined.

That seems crazy until you learn that Nvidia made a profit of US$193bn over the last year while the Russell 2000 members collectively lost -US$13bn.

It is easily forgotten, but a market that is heavily concentrated does not only have one option to find relief. It is also possible for the current leaders to pause and for laggards to catch up.

As a matter of fact, that's exactly the dynamic that was unfolding earlier this year. But sticky inflation and a seemingly indestructible AI infrastructure boom have put central bank rate hikes, including at the Federal Reserve, back on the agenda, and this has swung the pendulum back in favour of the Magnificent Mega-Caps.

Australia In Focus

The Australian share market had already been operating under a cloud of forthcoming RBA rate hikes, but --outside of the significant underperformance for the ASX-- there are more similarities with the US setup than many local investors might appreciate.

The domestic ASX200 has equally only found support from a select minority in 2026, as also yet again highlighted in a recent analysis by Macquarie's quant analysts.

The same study also explains the key idiosyncrasies in Australia and the US which are essential to understand the different challenges for active fund management in the two countries.

On Macquarie's analysis, US share market concentration has reached a truly unprecedented level post covid. Its analysis also shows US market leadership remains dynamic with mega-cap leadership renewing every 5-7 years.

One key difference with Australia is that US market leaders tend to outperform the broader market.

Hence, simply owning the index or overweighting alternative smaller cap options most likely results in benchmark underperformance, which is risky for career-conscious active managers.

The opposite holds true in Australia. Here, the narrow concentration at the top of the market doesn't change much and definitely not rapidly.

Sure, Telstra Group (TLS) and News Corp (NWS) were once the most important index heavyweights, but the top of the market still includes BHP Group (BHP), CSL (CSL), the big four banks, Woodside Energy (WDS), Wesfarmers (WES) and Woolworths Group (WOW) and these stocks have been among the local heavyweights for as long as most investors can remember.

The fact that Newmont Corp (NEM) and Macquarie Group (MQG) have joined BHP and the banks in more recent times hardly changes the fundamental framework.

Macquarie's analysis describes Australia's share market concentration as "broader, persistent and structurally familiar".

One key difference is that locally, the performance of index heavyweight is more likely to fall in line with the index (as opposed to mega-caps outperforming in the US).

Hence, the easiest strategy to obtain outperformance in Australia is to play around with portfolio allocations, i.e. buy more BHP and Rio Tinto (RIO) shares if you think those will do well going forward and buy less of, say, the banks, if you think their prices will most likely come under pressure.

Note: being underweight means you own the shares but at a lower percentage than the index weight. So if that position proves incorrect, you still benefit.

Also, when institutions go underweight the local banks, as is currently the case for most, they usually overweight the insurers, as is equally the case today.

Macquarie's analysis confirms what I instinctively believed is one key reason as to why technology stocks listed on the ASX this year do not mirror the same dynamics as their peers in overseas markets.

Institutional investors have no need to own these stocks. They can achieve their core objective by, say, being overweight large cap mining and energy companies while carrying underweight allocations to the big four banks.

Whether local managers actually achieve genuine outperformance remains a moot point. Recent data suggest the answer is 'seldom' or 'only in specific cases', but that's a discussion for another day.

Fund Managers' Active Portfolios

Following on from Macquarie's analysis, it is probably no surprise to anyone that Morgan Stanley's recent analysis of market positioning among domestic fund managers in Australia revealed CSL is now the number one held active portfolio position (as per August).

Not only have active portfolios generally increased exposure to healthcare and communication services, fund managers remain generally underweight the major banks and overweight insurers, while moving more underweight BHP and less so for Rio Tinto, and adding more gold sector exposure.

Interestingly, the local technology sector, irrespective of its continued dismal performance, remains on balance overweighted, as is communication services despite stakes in Telstra reducing.

Do note: communication services does not equal telecommunication. The likes of Seek (SEK) and Car Group (CAR) are also included.

The discretionary segment is also overweighted but here the detail matters; this is not a case of piling on into sagging share prices of retailers. Instead, gaming stocks Aristocrat Leisure (ALL) and Light & Wonder (LNW) are preferred.

Underneath, the dispersion in portfolios remains relatively large, but two favourite sectors stand out: healthcare and communication services, also signalling rather defensive positioning overall.

The two most underweighted sectors are Financials and Real Estate. No surprises here, that's the anticipation of more RBA rate hikes this year on clear display.

What certainly surprised me is that the local technology sector is the third most overweighted segment, although the dispersion between portfolios underneath the data remains large.

There must be a clear distinction between those who believe the AI trade is now dead and buried, while others remain willing to wait for a revival.

On balance, the optimists hold the upper hand. Not on performance, but on portfolio exposure.

As indicated, the number one stock on managers' buy list in August was CSL. The number two will surprise: CommBank (CBA), as portfolios reduced their underweight exposure.

Newmont, Light & Wonder and ResMed (RMD) complete the earnings season's top five.

Stocks on balance sold most include BHP, Telstra, Aristocrat Leisure (looks like a relative adjustment vis a vis Light & Wonder), Rio Tinto and ANZ Bank (ANZ).

In healthcare, CSL surpassed ResMed as the number one stock held in January and the gap in favour of the former has only increased since, with a large spike occurring once FY26 financials became public.

Among defensives, Coles Group (COL) is now everybody's favourite with Telstra retreating to the number two position post disappointment in August.

Santos ((STO)) remains most preferred over Woodside Energy (WDS) in the energy sector, followed by uranium developer NexGen Energy (NXG).

Most preferred financial is Macquarie Group (MQG). Rio Tinto is the number one in the Materials sector where Amcor (AMC) and Orica (ORI) are equally well-held.

Inside healthcare, Australian Clinical Labs (ACL), with a market cap of only $512m, is the fifth most popular exposure, behind CSL, ResMed, Fisher & Paykel Healthcare (FPH) and Ramsay Health Care (RHC).

The Lottery Corp (TLC), Domino's Pizza (DMP) and Guzman Y Gomez (GYG) complete the top five in Discretionary where both gaming stocks almost share the top position.

For exposure to local technology, fund managers prefer (in order of popularity) WiseTech Global (WTC), Xero (XRO), TechOne (TNE), Megaport (MP1) and Life360 (360).

Stockbrokers

In Australia, the negative trend in more rating downgrades from local stockbrokers, in place since late May, has now reversed towards more upgrades.

This week that trend reversal is picking up pace, including many smaller cap mining companies.

Not an upgrade, but a positive conviction statement by Citi on Goodman Group (GMG) caught my personal attention on Tuesday afternoon.

Local disinterest in the data centres-AI trade has allowed those shares to approach their low from March this year.

Citi thinks it's all sentiment, no fundamentals and expects positive announcements to be made about leasing outcomes in Hong Kong and Los Angeles before year-end.

The share price is expected to respond positively.

FNArena offers impartial, ahead-of-the-curve market commentary and analysis, on top of proprietary data and tools for self-managing and self-researching investors. The service can be trialed at fnarena.com