By Martin Baccardax

The number of stocks participating in the post-Liberation Day rally is starting to slip as summer nears its end. That is the latest signal that the market risks a tech-led pullback in September as investors navigate a slowing economy and a cautious Federal Reserve.

The Nasdaq Composite has fallen around 2.3% this week, twice the decline for the S&P 500, paced by pullbacks in Nvidia and Microsoft, the largest-weighted stocks on each benchmark. The reason for the divergence is that while megacap tech stocks have accounted for much of the market's performance this year -- earnings generation and profit growth forecasts stand out in this area -- the S&P 500's 28% rally from its early April lows included a host of stocks and sectors beyond tech.

The Nasdaq is more narrowly focused on tech.

"Market breadth helps assess the durability of a trend as it provides insight into how many stocks are participating in a price move," said Adam Turnquist, chief technical strategist at LPL Financial. "It also helps assess leadership trends by revealing what stocks are participating, and equally as important, what stocks are not."

Turnquist notes that the number of stocks trading above their 200-day moving averages, an important performance benchmark, surged from around 19% in early April to 68% at the end of July. Recent readings, however, suggest that broad participation is starting to fade.

Turnquist says that when the S&P 500 is within touching distance of a record high, around 74% of its constituents typically are trading above their 200-day moving averages. He currently pegs that reading at around 65%.

"It's still bullish, but it's not commensurate with breadth readings when the market is in record-high territory," Turnquist said.

Retail investors, who fueled much of the rally as net buyers of stocks for 16 of the past 18 weeks, based on data from Citadel Securities, are also starting to show some signs of fatigue.

The Association of Individual Investors' latest weekly sentiment survey, published Wednesday, suggests around 45% of those polled were bearish on the market over the next six months. Around 31% were bullish and 24% neutral. The survey's historical average for a bearish outlook is 31%, while its bullish reading is historically measured at 38%.

Bank of America also notes that September is historically the weakest month for the S&P 500, with an average decline of 1.17%.

"We continue to think the summer rally in the S&P 500 has generally made sense from a sentiment perspective, but is also starting to run out of room from that angle," said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a recent client note.

But she does see why the biggest megacap tech stocks have outpaced the broader market this month, and are likely to continue to do so over the final stretch of the year.

"The forward earnings outlook does help to explain why the biggest market cap names have continued to lead," she said. "Consensus earnings growth forecasts for the Mag seven for 2026 and 2027 remain above those of the rest of the S&P 500."

That means investors will focus on Nvidia's fiscal second-quarter earnings update, slated for Wednesday. The artificial-intelligence chip maker, which is the world's most valuable stock, is expected to deliver year-over-year earnings growth of around 48%, according to FactSet. The consensus call is that revenue will rise 53% to $45.9 billion.

Perhaps more important, investors will be looking for confirmation that companies are still pouring money into AI investments, which is fueling gains for a variety of other companies. Consensus expectations are that Nvidia will forecast revenue of around $52.8 billion for the current quarter and $203 billion for the year.

Wedbush analyst Dan Ives says that upbeat commentary from Nvidia likely would extend tech's market dominance. "Nvidia earnings is another positive catalyst that will further remind investors this is still only the bottom of the second inning in the nine inning AI Revolution," he said.

Write to Martin Baccardax at martin.baccardax@barrons.com

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August 21, 2025 11:15 ET (15:15 GMT)

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