For most of 2023, investors in the
did just fine, with a little help from the Magnificent Seven tech stocks. But with
and
both tumbling to start the year, that momentum trade is no longer a surefire winner.
The
Invesco S&P 500 Equal Weight ETF,
which shows how stocks are doing without the huge impact of market-cap giants like
and
is up 2.5% over the past month. That’s slightly ahead of the market cap-weighted
return in the same period, an encouraging sign. Communications services and energy stocks are among the leaders: It isn’t just tech.
“We view this rotational shift as an important development for the potential sustainability of this bull market,” said John Lynch, chief investment strategist with Comerica Wealth Management, in a report this week. He called the rest of the S&P 500 stocks the “Pretty Good 493,” saying optimism about profit growth for the entire S&P 500 is lifting the market.
Artificial intelligence isn’t the only big theme driving the market this year.
was a big winner in the first quarter because its theme-park business performed well, a sign that consumers are still willing and able to spend. And
surged because of demand for its GLP-1 weight-loss drugs.
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“The rally is broadening out. Companies are being rewarded for stability,” said Phil Blancato, chief market strategist at Osaic, a wealth management firm. “This truly is diversification at work.”
Highlighting the range of stocks that are doing well, the
has outperformed the
over the past month.
Of course, several of the Magnificent Seven stocks are still doing just fine, to put it mildly.
Nvidia
,
and
have all continued to surge thanks to hopes for AI. So has
a new entrant to the S&P 500.
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But experts are heartened by the improving breadth of the market, referring to the number of stocks going up versus those going down.
“Current breadth readings suggest a healthy and sustainable bull market. Participation in the rally has notably expanded, especially among the more cyclical sectors,” said Adam Turnquist, chief technical strategist for LPL Financial, in a report. “While there are signs of overbought conditions percolating; overbought does not mean the rally is over.”
Turnquist wrote that 86% of S&P 500 stocks recently closed above their 200-day moving averages, the highest level in three years. And there is momentum beyond tech, with financials, industrials and energy stocks all rising. “This is the kind of leadership you want in a bull market,” Turnquist said.
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Still, there are concerns that the current “everything rally” could be a sign that the market has gotten ahead of itself. Jason DeSena Trennert, CEO of Strategas Research Partners, joked at an event in New York Wednesday that in the current market, everyone seems to get a participation trophy for just showing up.
At the same event, Nathan Sonnenberg, chief investment officer at Pitcairn, a family office that manages money for affluent clients, noted that about 40% of the small-cap companies in the Russell 2000 index aren’t profitable.
But that doesn’t mean the rally has to end soon. Pitcairn chief global strategist Rick Pitcairn pointed out that AI could be like the “internet on steroids,” helping to boost the entire market in the same way the dot-com boom gave the major indexes a lift in the late 1990s.
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Investors also seem to be having a change of heart about the economy and possible interest-rate cuts. Heading into 2024, there was a sense that after raising rates to fight inflation, the Federal Reserve might need to cut them five or six times to avoid a recession, or limit the damage if one happens. But with the labor market and broader economy continuing to show resilience, investors are now expecting fewer reductions.
And they seem to realize that the reason for less easing isn’t a cause for panic.
“I’m not sure the economy is going to be weak enough to warrant more than one or two cuts,” said Christopher Marinac, director of research with Janney Montgomery Scott. “The underpinning of the economy is still positive.”
In other words, good news is good news for investors.
Write to Paul R. La Monica at paul.lamonica@barrons.com
