Since the bull market began in October 2022, investors believe that the stock market rally has been driven primarily by artificial intelligence and the outperformance of a few large-cap stocks, and that the rally has not spread far enough to sustain it. There are growing concerns about this.
That may be changing.
Stock markets have been spooked in recent days following the announcement of higher-than-expected inflation on Thursday. Investors are rapidly pricing in an increased likelihood that the U.S. Federal Reserve will cut interest rates in September, with investors moving to non-tech sectors, the most popular sectors in the market over the past year. The sector is underperforming.
The Round Hill Magnificent Seven ETF, which tracks a group of large-cap tech stocks that led the rally in 2023, has fallen more than 1.5% over the past five days. Meanwhile, interest rate-sensitive sectors real estate (XLRE) and financials (XLF) have been the market’s biggest winners over the same period. The small-cap Russell 2000 (RUT) index rose more than 7%, finally breaking above its 2022 high for the first time in the current bull market.
Another sign that a broad range of stocks are rising is the equal-weighted S&P 500 (^SPXEW ) is outperforming. The traditional market capitalization weighted S&P 500.
Carey Cox, chief market strategist at Ritholtz Wealth Management, told Yahoo Finance that recent market movements have been “refreshing,” with a wide range of stocks contributing to the rally and further supporting stocks. This could be a sign of a maturing bull market, he said. Index at record level.
“If this trade continues and we still have the prospect of a rate cut this fall, we could finally see the bulls wake up. That’s good news for all investors,” Cox said. .
This is not the first time strategists have expressed optimism about the kind of market rotation currently occurring. December 2023 and the first quarter of this year saw further activity in widespread gatherings.
The question is: Are the stock market’s big gains finally starting to expand, or is this another fake as the market becomes overly optimistic about the Fed’s interest rate cuts?
“The level of confidence we have now is higher than it was in December (when the market was rallying led by the Fed’s pivot),” Oson Kwon, senior equity strategist at Bank of America Securities, told Yahoo Finance. prices are also rising,” he said.
Kwon points out that the narrative driving the bull market — expectations for a soft landing and gradual Fed rate cuts — remains largely unchanged from previous expansionary spurts. But this time, “the earnings backdrop is also really supporting this rotation,” he said.
the story continues
Bank of America’s earnings analysis shows that 493 stocks, excluding Big Tech’s Magnificent Seven, are expected to increase year-over-year earnings during this reporting period for the first time since 2022. As seen in the chart below from JPMorgan Asset Management’s June interim outlook, earnings growth for these stocks is expected to accelerate in the coming quarters, while Big Tech’s earnings growth is expected to slow. It is expected.
Given that earnings are typically the main driver of share prices, this would support the theory of more upside. However, an important caveat is that these are just expectations. And given that the market has struggled to produce a variety of winners so far this year, some strategists would like to see actual earnings growth to support the narratives currently built into their forecasts. That’s what I think.
“We expect earnings growth to come from more sectors than just technology,” Cox said. “I think that’s the big theme this period. We’ll see how many sectors can really participate and drive up the S&P 500 earnings expectations.”
The same goes for other stories that support recent rotations. The market is currently pricing in a more than 90% chance that the Fed will cut interest rates in September, according to the CME FedWatch tool. But again, Cox is cautious about declaring that expansion will definitely continue.
“Until we officially enter a rate-cutting cycle, it’s hard to say that this increased trade will continue,” Cox said. “I hope so. I’m optimistic, but there’s still going to be a market that depends on all the economic data coming from the tape.”
Kevin Gordon, senior investment strategist at Charles Schwab, is also cautious about declaring that a major expansion has arrived. Gordon said “greater clarity” about the Fed’s rate cutting cycle and its reasons for initiating rate cuts remains paramount, especially for the most rate-sensitive areas of the market such as small-cap stocks.
Mr Gordon insisted that recent market movements were a “huge step in the right direction”. But the widespread uptick won’t happen overnight, Gordon said. He added: “It’s natural for everyone to say it’s such a great rotation, but great rotations tend to take a little longer than a few days.”
And even if that rotation happens slowly, recent index performance suggests a different, slower upward path for the S&P 500 as well. The S&P 500 closed last Thursday despite the release of a promising June inflation report as investors moved away from large-cap tech stocks, which are more heavily weighted in the index than small-cap stocks.
“We may be seeing a little bit of this volatility where some stocks are passing the baton to others,” Cox said. “Tech stocks are passing the baton to other stocks. Sure, prices may not rise as quickly as they did. But this is the kind of move that strengthens the fundamentals of the bull market. , which means this rise is more powerful and potentially more powerful.”You end up living longer.” ”
Charging Bull bronze sculpture in the financial district of Manhattan, New York, October 23, 2022. The sculpture was created by Italian artist Arturo Di Modica in response to the 1987 Black Monday stock market crash. (Photo by Beata Zawrzel/NurPhoto via Getty Images) (NurPhoto via Getty Images)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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