The S&P 500 had a great 2019 after a tough end in 2018, right? Markets saw the best January in 30 years and seemed to never look back. The index closed December 2019 at $3,230.78, a 28.9% year-on-year gain, using figures that take stock splits into account but not dividends.
So why are some experts being cautious? Because, as a Fortune analysis of individual shares data shows, despite the 2019 hype, big cap stocks weren’t as fundamentally strong as many would have thought. There are plenty of warning signs that could undermine markets in 2020, particularly if geopolitical tensions escalate or the touted trade deal with China doesn’t deliver the way investors want.
The U.S. attack on Iran has already let the air out of an early 2020 rally, with the S&P 500 down close to 0.5%. A bigger shock, like extended armed conflict or significant backtracking in trade developments, could lead to a correction over the entire S&P 500 and a shake-out for many companies that had looked like great performers but had actually benefited from a tide that seemed to lift all boats.
Less than it looks
Averages can make everything look the same. But the S&P 500’s performance in 2019 was anything but uniform. Performance by sector varied greatly, and more than one in ten of companies on the index had a down year. Plus, much of the gains early in the year were a reaction to the bad previous December.
“While the S&P’s 30% gain appears massive, it’s largely a rebound off the free-fall we experienced at the end of 2018,” says Max Gokhman, head of asset allocation at Pacific Life Fund Advisors. “The index is up just 10.86% from its October 2018 peak.” Low interest rates from a “friendly Fed” gave companies the opportunity to borrow money at low costs to finance share buybacks, making their stocks more attractive “absent earnings growth and profit margins that started being squeezed off their stretched highs.”
“Despite all the headline risks—from impeachment to Brexit to trade wars—it has been a remarkably calm year for the stock market,” says Scott Krase, founder and president of CrossPoint Wealth. “We’ve only seen 37 days when the S&P moved up or down by 1% or more from the prior day. And there have only been seven 2% [or more] days. Those are some pretty low numbers.”
Even today, with the Iran news, the S&P is seeing far below a 1% shift.
And then there’s the inconsistency. The upper end of gainers in the S&P 500 experienced stock price gains far beyond that of the index’s near 29% rally. The top 10 price increases ranged from 83.2% for Xerox to 143.5% for Advanced Micro Devices, again using closing numbers that include splits but not dividends and measuring from the close of Jan. 2 to that of Dec. 31.
However, that’s only part of the picture. Many companies fared far worse: roughly one in nine (11.4%) ended 2020 with a full-year share price in the red. Those at the bottom lost anywhere from 25.9% to 45% of their value.
Beyond the extremes is the weighted nature of the index, which can whipsaw the entire S&P 500. The top 10 stocks—including such companies as Apple, Walmart, Amazon, Google parent Alphabet, Microsoft, and JP Morgan Chase—make up almost 25% of the index’s value. This group saw price growth from 14.1% to the 85.9% of Apple, which, alone, is 4.6% of the entire S&P 500’s value.
“Many people already forgot that Apple fell almost 40% over a very short term, back in the fourth quarter of 2018, but everybody remembers that it jumped about 90% after,” says Krase.
There has also been big variations in performance by company type. The table below shows each of the S&P’s 11 industry sectors along with the number of companies, median (middle-of-the-pack) share performance during 2019, and the percentage of companies in the sector whose shares lost value for the full year.
Energy was the worst performing sector, but there are nine sectors in which the median performance is below the overall 28.9% growth of the index. The median for the entire S&P 500 is 27.1%, meaning that performance for the index is top-weighted.
Combined with the sector variations, all the data suggest that the market’s strength is far from uniform, which is an inherent problem. What has happened in previous cycles in 2013 and between 2016 and 2017 is that a breadth of gains across many stocks doesn’t last, although market gains on the average may reach additional peaks.
“Even with the market continuing much higher in the previous two cases, the breadth never gets back to that high level,” says Kenley Scott, director, research analyst, and senior equity analyst at William O’Neil and Company. “You’ll start to see winners and losers emerge when that picture changes. Even a 5% or 7% pullback, which is totally normal; when that happens, there will be stocks that don’t go down and there will be stocks that go down a lot more.”
The question is what might trigger that pullback, which, in the face of history, seems unavoidable. Might it be a Middle Eastern armed conflict? Resurgent overseas markets, which could offer an alternative to U.S. Treasurys and equities, softening domestic demand here and a weakening dollar that no longer amplified gains compared to other currencies. Even the signing of a phase one trade deal with China could set things off if the details, when finally revealed, don’t hold up the expectations of investors.
So, hold on. The next few months could be memorable, and not in a good way.
More must-read stories from Fortune:
—2020 Crystal Ball: Predictions for the economy, politics, technology, etc.
—Why you actually may want to buy “bears” in a bull market
—5 CEO exits that sum up the memorable business year that was 2019
—What a $1,000 investment in 10 top stocks a decade ago would be worth today
—Apple’s stock soared 89% in 2019, highlighting the company’s resilience
Don’t miss the Term Sheet, Fortune’s newsletter on deals and dealmakers.