The 5 largest mega-cap stocks are responsible for most of the rally in the S&P 500 this year - but the market can still gain if Big Tech fades

Narrow market breadth generally "does not represent a bad omen for S&P 500 performance," said BMO Capital Markets.

• Apple, Nvidia, Alphabet, Microsoft and Amazon have fronted the S&P 500's advance so far in 2023. 
• But if the rally in those mega-caps fades, the market can still post gains, said BMO Capital Markets 
• Also, narrow market breadth generally "does not represent a bad omen for S&P 500 performance." 

The $1 trillion club of mega-cap stocks has been on a sizzling run-up this year and is carrying the bulk of the S&P 500's advance, but the equity market can still gain if the rally in that elite group peters out, said BMO Capital Markets. 

The S&P 500's five largest stocks by market capitalization — Apple, Nvidia, Alphabet, Microsoft and Amazon — have outperformed the index by 30 percentage points this year and have outperformed it for a fifth straight month with May drawing to an end.

Nvidia has played a starring role, with the stock more than doubling on the company's AI exposure. The chipmaker on Tuesday touched a $1 trillion valuation for the first time.

The AI investment frenzy set off by ChatGPT has also helped push up Alphabet stock up 40%. Shares of Amazon, Apple, and Microsoft were also outpacing the S&P 500's nearly 9% gain. 

"[Many] investors have become increasingly concerned about the potential effects that this top-heavy market could have on overall performance, especially if momentum in these names begins to wane," Brian Belski, chief investment strategist at BMO, wrote in a research note published this week. 

"However, our work shows that once relative performance of these mega-caps has subsided or winning streaks have ended, the broader market has historically held up just fine with gains being more common than losses." 

He said market gains have been "prevalent" in the wake of previous outperformance streaks of five months or more in super-sized stocks, with the S&P 500 rising 6.7%, on average, in the subsequent six-month period. In the 12 months afterward, the S&P 500 climbed an average of 22.2%. The S&P also logged positive price returns 100% of the time. 

The most recent example was in April 2020, at the end of a seven-month mega-cap winning streak. Six months out, the S&P 500 was up more than 12%, and 12 months out, it had tacked on 43.6%. 

"In addition, putting mega caps aside, we found that narrow market breadth in general does not represent a bad omen for S&P 500 performance despite the contrary narrative being pushed by many investors," said Belski. 

Digging into records going back to 1990, Belski said there were 12 periods when market breadth was downward for six months or longer. 

"Our work shows that the S&P 500 index recorded a 13.2% annualized price return during these periods of narrowing market breadth with the only loss coming in 2001-2003," he wrote.