Indications suggest that the US stock market rally is expanding beyond the dominance of mega-cap growth and technology companies, sparking optimism among investors for a sustained rally through the end of the year.
The surge in equities, exemplified by the S&P 500’s impressive 8% increase in November, has positioned the index on the brink of a new high for 2023. Driving this momentum are falling Treasury yields and moderating inflation readings, potentially signaling a halt to Federal Reserve rate hikes. The inverse relationship between Treasury prices and yields has been a key factor, with lower returns on fixed-income investments making stocks more attractive.
While skepticism lingers among some major investors regarding the rally’s longevity, recent market indicators point to increased strength in areas that have underperformed throughout the year.
One encouraging signal is the fact that approximately 55% of the S&P 500 components were trading above their 200-day moving averages as of Monday. This surpasses the 50% threshold breached just last week, marking the first time in nearly two months, as reported by LPL Financial.
Adam Turnquist, Chief Technical Strategist at LPL Financial, noted, “Breadth is finally starting to broaden out to levels more commensurate with bull markets. This has been one of the keys to calling this recovery sustainable.”
Equal-weighted Strength
Further signs of a more diversified rally include the noteworthy performance of the equal-weight S&P 500, a proxy for the average stock in the index. Last week, it rose by 3.24%, significantly outpacing the 2.24% gain for the market-cap weighted S&P 500. This marked the most substantial percentage point outperformance for the equal-weight index in almost five months.
Despite this recent surge, the equal-weight S&P 500 has only gained 3% in 2023, in stark contrast to the 18% rise for the overall S&P 500, showcasing the significant impact of the Magnificent Seven: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. Collectively, these mega-cap stocks constitute 28% of the S&P 500 index and nearly half of the Nasdaq 100, which has seen a remarkable 47% increase year-to-date.
Revival of Small-Cap and Bank Stocks
Encouragingly, struggling small-cap and bank stocks have experienced a revival, particularly after last week’s unchanged US consumer price data for October. The Russell 2000, representing small-cap stocks, is up 5.5% since the CPI data release, while the S&P 500 banks index has surged by 6.5%, surpassing the 3% rise for the S&P 500. Despite these gains, the Russell 2000 has only managed a 2% increase year-to-date, compared to a 6% decline for the S&P 500 banks index.
Mona Mahajan, Senior Investment Strategist at Edward Jones, sees an environment conducive to a broader rally taking shape, citing factors such as cooling rates, moderating inflation, and a sidelined Federal Reserve as favorable conditions for risk assets.
Despite the positive indicators, there are reasons for caution. Investors will closely watch upcoming readings on consumer confidence and inflation, which could trigger a Treasury selloff and subsequent yield increase if stronger than expected. Additionally, the recent rally, accompanied by high demand for upside call options, may face headwinds as investors approach the year-end book closing, with concerns that much of the good news is already priced in. Jason Draho, Head of Asset Allocation Americas at UBS Global Wealth Management, warns that investors might be hesitant to chase the rally in the US stock market.
Source: Reuters
