Investors are finding renewed hope for a sustained rally in the US stock market as signs emerge that the surge is extending beyond the dominance of mega-cap growth and technology companies, often referred to as the Magnificent Seven. The rally in the stock market, driven by a variety of factors, is lifting equities significantly, with the S&P 500 marking an over 8% increase in November, poised to hit a new high for the year.
Two key contributors to the market surge are falling Treasury yields and cooling inflation readings, indicating a potential halt to Federal Reserve rate hikes. The appeal of stocks is growing as Treasury prices rise, causing yields to fall on fixed-income investments. While some major investors remain skeptical, recent indicators suggest a broader market strength, including gains in areas that had lagged earlier in the year.
As of Monday, approximately 55% of the S&P 500 were trading above their 200-day moving averages, surpassing the 50% mark from last week for the first time in nearly two months, according to 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.”
One encouraging sign is the rise of the equal-weight S&P 500, a proxy for the average stock in the index, which climbed 3.24% last week—substantially outperforming the market-cap weighted S&P 500. Despite this, the equal-weight index has gained only 3% in 2023, compared to the overall S&P 500’s 18% rise, highlighting the outsized influence of the Magnificent Seven, which collectively constitute 28% of the S&P 500 index.
Struggling small-cap and bank stocks have seen a boost, especially following unchanged US consumer price data for October. The Russell 2000 is up 5.5%, and the S&P 500 banks index has risen 6.5%, outperforming the 3% rise for the S&P 500. However, the year-to-date performance reveals a 2% increase for the Russell 2000 and a over 6% decline for the S&P 500 banks index.
Mona Mahajan, Senior Investment Strategist at Edward Jones, sees a conducive environment for a broader US stock market rally taking shape, emphasizing the cooling of rates, moderating inflation, and the Federal Reserve remaining on the sidelines as positive factors for risk assets.
Yet, caution is advised. The equal-weight S&P 500 currently trades at a 5% discount to its 10-year average forward price-to-earnings ratio, according to Edward Jones. Investors will receive further readings on consumer confidence and inflation next week, with stronger-than-expected data potentially triggering a selloff in Treasuries and higher yields.
Despite the recent surge pushing the S&P 500 up approximately 10% over the last three weeks, some experts believe the rally may be short-lived as investors approach year-end book closures. Jason Draho, Head of Asset Allocation Americas at UBS Global Wealth Management, warned that much of the good news might already be priced in, and investors could be reluctant to chase the US stock market rally.
Source: Reuters
