Is the S&P 500 Bull Market Finally Broadening?

Tech stocks led the charge, but could smaller companies be about to shine?

Introduction: The Power Behind the Bull Market

Since October 2022, the U.S. stock market has been in a strong bull market. This surge has been powered by a group of high-performing tech giants, often referred to as the "Magnificent Seven". These mega-cap companies have significantly driven the gains of the S&P 500, particularly within the Nasdaq 100, which has soared by nearly 118% since the beginning of the bull run.

But while the headlines focus on these few names, there are signs that the rally may be broadening to include more of the market – a potentially game-changing development for investors.

The Dominance of the Magnificent Seven

• The "Mag-7" have doubled their share of the S&P 500’s market capitalisation – from 16% to 32%.
• These tech giants have reshaped how the index performs, making it heavily reliant on their movements.
• Yardeni Research notes this unusual level of concentration hasn’t completely left other stocks behind.

Signs the Rally May Be Broadening

Despite the dominance of large-cap tech, recent data shows other parts of the market are also gaining traction:

• Yardeni Research reports a rising percentage of S&P 500 companies showing positive changes in forward revenues and earnings.
• Mid- and small-cap stocks (including the S&P 493) have posted solid, if quieter, gains.
• Indicators suggest investor interest is slowly spreading beyond mega-caps.

What About Smaller and Mid-Cap Stocks?

While large-cap stocks have led the way, small and mid-cap companies (SMidCaps) have underperformed for much of the last decade. Since 2022, they've lagged further – but this may be shifting:

• SMidCaps have recently bounced back on expectations of a more dovish Federal Reserve.
• Their lower valuation multiples could make them attractive as the market searches for new growth stories.
• Yardeni Research advises rotating some profits from mega-cap winners into these undervalued areas.

Parallels with the Past – But Is It Different This Time?

Some analysts draw comparisons with the late 1990s, when rate cuts during the Long-Term Capital Management crisis helped fuel the dot-com bubble. With another Fed rate cut widely anticipated at the September 17 FOMC meeting, could we see a similar melt-up?

However, this time the fundamentals appear stronger:

• Technology and communication services now contribute 36.9% of forward earnings in the S&P 500.
• That compares to just 24% during the height of the 2000 dot-com bubble.
• This suggests today’s market may be on firmer ground.

Conclusion: A Changing Tide for Equity Investors?

The S&P 500 bull market has thus far been a story of tech dominance. But there are signs that the tide may be turning. Broader market participation, improving fundamentals across sectors, and expected Fed support could give investors reason to explore beyond the big names.

What could this mean for share prices?

• If smaller and mid-cap stocks continue to strengthen, we may see more balanced market growth.
• Diversification could be key – relying solely on tech giants may no longer be the smartest move.
• Investors may benefit by reassessing their portfolios, taking profits from overvalued sectors, and rotating into overlooked areas with strong earnings potential.

As the market matures, so too should our investment strategies. A broader bull market could offer wider opportunities – but only for those willing to look beyond the obvious.

Sources: (Investing.com, Reuters.com, AI)