(Bloomberg) — The record-setting rally in the S&P 500 is leaving many of its members behind. 

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The index’s gains have been fueled by some big companies, such as Tesla Inc. and Alphabet Inc., that are heavily weighted in the index. But beneath the surface is another picture: about 84% of its companies’ shares are still below their 52-week highs.

That disconnect raises some alarm bells for Morgan Stanley strategists including Mike Wilson. They wrote in a note Monday that it shows the narrow breadth of the S&P 500’s advance, one that’s been propelled in part by an influx into index funds.

“The index has been propped up by record retail/passive inflows this year and is not indicative of the increasing uncertainty many companies are now facing as we try to fully restart the economy,” the analysts wrote. 

© Bloomberg Despite S&P 500 rally, only 16% of members are at 52-week highs

While the Morgan Stanley strategists expect seasonal trends to carry stocks for the remainder of 2021, they see uncertainty and lower valuations catching up to the broader index next year. 

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The divergence within the S&P 500 shows how a handful of stocks tend to carry the market, posing a headache for active stock pickers who aim to beat the benchmark. The trend was in full view on Friday, when Tesla’s market valuation surpassed that of the entire S&P 500 energy sector. 

Even so, one bull is less worried about the under-the-surface weakness. 

“At face value, it is a bit concerning because it really just reminds us that the S&P 500 is a very top-heavy index,” said Sam Stovall, chief investment strategist at CFRA Research.

Yet he said there are some promising signs. While the percentage of stocks trading at 52-week highs is low, the number that could be approaching those highs is rising: 85% of the sub-industries in the U.S. equity benchmark index are trading above their 50-day moving averages, an indication that companies are recovering along with the market, according to CFRA. Moreover, data compiled by Bloomberg shows that 74% of individual members in the S&P 500 are trading above their 50-day moving averages. 

“The market’s new highs will get confirmation as an increasing number of stocks and sub-industries attain 50-day moving averages,” Stovall added.

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