Broadening Gains in US Stock Market Underscore Optimism on Economy

As we analyze the current landscape of the US stock market, it’s pivotal to note that the broader gains in the S&P 500 are signaling a renewed optimism regarding the economy. Unlike earlier in the year, when the rally was majorly fueled by a select group of heavyweight technology stocks, we are now witnessing a diverse range of sectors contributing to the market’s upward trajectory. This shift paints a promising picture for the second half of 2024, particularly as we head into a critical phase marked by forthcoming employment data and corporate earnings announcements.

Positive Momentum Beyond Tech

The S&P 500 is on course to achieve approximately 5% growth in the third quarter, culminating on Monday. What we are seeing is a gratifying distribution of gains across more than 60% of the S&P 500 components, an impressive contrast to the mere 25% in the early months of 2024. Importantly, the equal-weight version of the S&P 500 has outpaced its market-cap-weighted counterpart, climbing by about 9% this quarter, while major players like Nvidia and Apple still command significant attention but are not solely dominating market performance.

According to Kevin Gordon, a senior investment strategist at Charles Schwab, this redistribution of performance across sectors is a healthy sign. “Even if the megacaps aren’t contributing as much, as long as the rest of the market is doing well… I think that’s a healthy development,” he noted. This sentiment is further reinforced by the fact that industrial and financial sectors — notoriously sensitive to economic shifts — have observed gains of approximately 10% each this quarter.

Impact of Federal Reserve Decisions

The Federal Reserve’s recent decision to initiate its first rate-cutting cycle in four years with a significant 50-basis point reduction is a game-changer. Chairman Jerome Powell assured that this decision aims to support a resilient economy, steering traders towards expectations of more aggressive cuts when the Fed reconvenes in November. Traders are anticipating over 190 basis points of reductions through the end of 2025, according to LSEG data.

This reduction in rates is particularly advantageous for smaller companies and sectors traditionally higher in debt, producing a nearly 9% growth in the small-cap focused Russell 2000 index this quarter. Furthermore, interest in stocks that serve as market bond proxies has surged, with sectors like utilities and consumer staples rising by 18% and 8%, respectively.

Performance Across Sectors

Seven out of the eleven sectors within the S&P 500 are outperforming the index as we close out the quarter. This stands in stark contrast to the first half of 2024, where only the technology and communications sectors were ahead. The year-to-date performance of the S&P 500 has exceeded 20%, escalating to record levels with a noticeable dilution in the influence of the so-called “Magnificent Seven” tech giants, whose collective weight in the index has diminished from 34% to 31% since mid-July.

King Lip, chief strategist at BakerAvenue Wealth Management, remarked, “I find it to be quite healthy that tech has kind of consolidated.” While we are far from declaring a bear market for technology, there is clear evidence of sector rotation as investors express increased confidence in more economically sensitive areas.

The Path Ahead: Economic Data on the Horizon

However, we must remain vigilant. The breadth of the market rally depends on the forthcoming economic data, specifically job reports expected on October 4th. Previous job reports have indicated a weakening trend, raising questions about the sustainability of this ‘soft landing’ scenario. Additionally, corporate earnings in the upcoming season will serve as a litmus test for the enduring strength of this broadening market momentum.

Projected earnings also highlight a divergence; the “Magnificent Seven” are anticipated to see a robust 20% earnings increase in the third quarter, contrasting with a mere 2.5% profit rise for the remaining constituents of the S&P 500. Analysts are optimistic that this gap will narrow as we progress into 2025, with expected earnings increases of 14% for the broader S&P 500, alongside a still strong 19% for the tech giants.

Conclusion: A Call for Caution and Confidence

In summary, while the current environment of broadening gains within the US stock market brings optimism, it is vital for investors to temper that optimism with prudence. The projected economic data and earnings will be paramount in determining whether this rally can withstand challenges ahead. Remember, investing is not merely about riding the highs but strategically navigating with a grounded understanding of fundamental economic indicators. Buckle up, because it’s an exhilarating ride ahead.