By Lewis Krauskopf, David Randall and Saqib Iqbal Ahmed
NEW YORK, November 24 (Reuters) – Signs that the U.S. stock market rally is widening from the so-called Magnificent Seven of mega-cap growth and technology companies are boosting investors’ hopes of a rally through the end of the year.
Stocks rose sharply, with the S&P 500 .SPX more than 8% in November, on the cusp of a new high for 2023, fueled by falling Treasury yields and cooling inflation readings that could signal the end of Federal Reserve rate hikes. Yields fall when Treasury prices rise, and the lower yields of guaranteed fixed-income investments make stocks more attractive.
In one encouraging sign, about 55% of the S&P 500 traded above its 200-day moving averages on Monday. That level broke 50% last week for the first time in nearly two months, according to LPL Financial.
“Bridth is finally starting to widen to levels more commensurate with bull markets,” said Adam Turnquist, chief technical strategist at LPL Financial. “This was one of the keys to calling this recovery sustainable.”
Among other markers, the equal weight S&P 500 .SPXEW — a proxy for the average stock in the index — rose 3.24% last week. That was substantially more than the 2.24% increase for the market cap weighted S&P 500. .SPXthe largest percentage point outsideformance for the equal weight index in almost five months.
Even so, the equal-weighted S&P 500 index gained just 3% in 2023 versus an 18% increase for the overall S&P 500 — on pace for the largest such annual percentage gap in 25 years.
Much of that underperformance is due to the outsized gain in the Big Seven stocks that collectively hold a 28% weight in the S&P 500 index: Apple. AAPL.OMicrosoft MSFT.OAlphabet GOOGLE.OAmazon AMZN.ONvidia NVDA.OMeta Platforms META.O and Tesla TSLA.O. Overall, the group of shares makes up almost 50% of the weighting of the Nasdaq 100, which is almost 47% for the year to date.
Struggling Small cap and banking stocks rallied, especially after last week in the US consumer price data for October was unchanged from the previous month.
The small-cap Russell 2000 .RUT is up 5.5% since the CPI data with the S&P 500 banking index .SPXBK increased 6.5%, against 3% rise for the S&P 500. Year to date, the Russell 2000 is up 2%, while the S&P 500 banks index has fallen more than 6%.
Mona Mahajan, senior investment strategist at Edward Jones, said an environment that could be conducive to an extension of the rally is “starting to take shape.”
“This environment where rates are cooling, inflation is moderating and the Fed is on the sidelines, that’s usually a good backdrop for risk assets,” Mahajan said.
“Typically when rates start to move lower, you get valuation expansion and the areas that we could see some more significant valuation expansion is outside of large-cap technology,” she said.
The equal-weight S&P 500 is trading at a 5% discount to its 10-year average forward price-to-earnings ratio, according to Edward Jones.
However, there are reasons to think that the market rally is not on the verge of continued expansion.
Investors will get more readings on consumer confidence and inflation next week. Stronger-than-expected data could spur a selloff in Treasuries, sending yields higher.
At the same time, the stock’s sharp rally for the week ended Nov. 17 was accompanied by high demand for premium call options, particularly in parts of the market that have underperformed this year, such as the iShares Russell 2000 ETF focus caps. IWM.P.
Some of that has already begun to unwind.
“We’ve seen a huge pick-up in expectations for IWM, but now those seem to be stabilizing,” said Steve Sosnick, chief strategist at Interactive Brokers.
The recent rally that has pushed the broad S&P 500 about 10% over the past three weeks may not continue as investors prepare to close their books for the year, said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management.
“A lot of good news is already priced in and investors may be reluctant to chase the rally,” he said.
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(Reporting by David Randall, Lewis Krauskopf, Saqib Iqbal Ahmed; Editing by Megan Davies and David Gregorio)
((David.Randall@thomsonreuters.com; 646-223-6607; Reuters Messaging: david.randall.thomsonreuters.com@reuters.net))
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