Why and how the market can keep going up as breadth disintegrates

The S&P 500 is at 1878. It is up 1.61% YTD, 23.7% 1 yr, 31% since January 2013, 62.5% since October 2011.

The Nasdaq Composite is at 4,336. It is up 3.2% YTD, 36.8% 1 yr, 42% since January 2013, 75% since October 2011.

Those are all big numbers. Especially in the context of an anemic economy and being toward the end of a regular market cycle.

Earnings growth has been substantial. The S&P is trading at 15x forward earnings. The Nasdaq is trading at 18x forward earnings. Valuation is above average but by no means extreme or even stretched. It could also be argued that with rates low and expected to be low for a long time, multiples could be substantially higher. The march higher has been broad based, lead by small and mid caps.

Beyond the aggregate data, I think there is another catalyst that I have not seen talked about that could easily see the major benchmarks substantially higher (even as the broader market and market breadth falls away).

That catalyst is the low relative valuation of the benchmarks major components. The top 10 companies in the S&P 500 comprise 18% of the benchmark weighting. The top 10 companies of the Nasdaq Composite comprise 32% of the benchmarket weighting. Those companies look to me to be substantially undervalued relative to the benchmarks smaller components. If their multiple were to rise from an undervalued average of 13x to a more normal 15x, then that could easily propel the indexes much higher (throw in earnings growth and dividend yield for added support), even as breadth trails off.