August 2023
Broadening Market Rally a Positive Sign
August 1, 2023
More stocks have joined the equity market rally, signaling that the S&P 500, currently returning almost 20% year-to date, has more room to run.
Through to June the equity market’s rally was “top heavy”, with more than 85% of the S&P’s returns coming from the 10 biggest stocks. Although AI mania gave investors a good reason to seek out the largest cash-rich, tech-driven names, rallies need more breadth to be sustainable.
But now the other 400 stocks are catching up, as earnings estimates stabilize, recession fears fade, rates near their peak and inflation cools.
Today, more than 70% of S&P 500 stocks are trading above their 200-day moving average, versus a little over 40% at the end of May. Meanwhile, the top 10’s contribution to S&P profits has slipped to 70%, which is the lowest all year.
The rally has also broadened beyond the biggest companies. At 13% year-to-date, the small cap Russell 2000 is returning nearly twice as much as the Dow Jones Industrial Average.
Along with declining recession odds, there is also a significant amount of cash on the sidelines, which could be deployed as investors fear missing out on the rally. We believe the market’s bias remains to the upside.
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