The U.S. stock market is experiencing an encouraging surge, with the S&P 500 seeing broader participation in its ascent to record highs, which alleviates fears that the rally was too reliant on a handful of dominant tech giants. As we approach the end of the third quarter, it’s projected that the S&P 500 will have gained around 5%, driven by optimism surrounding potential Federal Reserve interest rate cuts that could bolster economic growth.
Investors are increasingly eyeing regional banks, industrial firms, and a variety of other sectors as promising opportunities. More than 60% of the components within the S&P 500 have outpaced the index this quarter, a significant increase compared to about 25% in the early part of the year. Notably, an equal-weighted S&P 500 index, which reflects the average performance of its constituents, has seen a robust gain of approximately 9%, outperforming the traditional index heavily influenced by major players like Nvidia and Apple.
This broadening rally is not just luck; it signifies a more balanced market sentiment, offering growth prospects beyond the tech sector that has fueled momentum in 2024. Market watchers believe that the “soft landing” narrative—anticipating resilience in economic growth—will be further validated by upcoming employment data and the seamlessly approaching corporate earnings season.
Kevin Gordon, a senior investment strategist at Charles Schwab, highlights that the latter half of the year contrasts sharply to the first half, suggesting a healthy evolution in market dynamics. Importantly, the Federal Reserve began its most recent rate-cutting cycle, which marks a significant shift in monetary policy aimed at sustaining economic stability. As traders speculate on further cuts when the Fed reconvenes in November, the potential for nearly 190 basis points in reductions through 2025 is on the table, according to data from LSEG.
Various sectors are jumping on the optimism wagon, particularly industrials and financials, which have posted gains exceeding 10% this quarter. Small-cap stocks are also seeing benefits from lower borrowing costs, with the Russell 2000 reflecting nearly a 9% rise. Additionally, stocks classified as “bond proxies,” often known for stable dividends, are gaining traction, attracting investors in search of secure income sources.
Out of the S&P 500’s 11 sectors, seven have outperformed the index, marking a stark contrast from the first half of the year, wherein only tech and communications thrived. The influence of mega-cap stocks like the “Magnificent Seven”—which includes Apple, Microsoft, and Amazon—has slightly waned, showing that investor interest is diversifying.
As we look forward, economic indicators such as employment statistics on October 4 will be crucial in determining whether this optimistic trend can continue. Both the job market performance and earnings reports from companies outside the tech sphere will be critical in justifying the current market rally.
Predictions indicate that the “Magnificent Seven” companies are set to see earnings jump by around 20% for the third quarter, compared to a modest 2.5% increase for the remainder of the S&P 500. This disparity is expected to narrow by 2025, with overall earnings for the S&P projected to rise robustly. In a successful “soft landing” scenario, it’s vital that profits are supported by broader industry performance, rather than relying solely on technology stocks.
The evolving landscape of the stock market is creating a captivating environment for investors, bolstered by a collective sense of optimism regarding the state of the economy. As earnings season approaches, all eyes will be on how various sectors, especially those outside traditional tech dominance, respond to ongoing economic trends. The coming weeks could determine if this newfound market breadth signals a sustainable recovery going forward.