Louis Krauskopf
NEW YORK (Reuters) – More stocks are joining the S&P 500’s recent march to record highs, allaying concerns about a bull market centered on a few big technology stocks for much of 2024.
The S&P 500 is expected to rise 5% in the third quarter ending Monday. But this time, optimism that the Federal Reserve’s rate cuts will boost U.S. growth has led investors to invest in already hot tech stocks, as well as regional banks, industrial companies and other companies benefiting from a strong economy and low interest rates. It encourages investment in the stocks of companies that enjoy the benefits of Huge profits this year.
More than 60% of S&P 500 constituents have outperformed the index so far this quarter, compared to about 25% in the first half of this year.
At the same time, the equal-weighted version of the S&P 500 (a proxy for the average index stock) rose 9% in the quarter, outperforming the S&P 500. The S&P 500 is more influenced by stocks with a heavy weight of megacaps. Like Nvidia and Apple.
Investors said the broader rally was a positive sign for stocks, after concerns that the market could be vulnerable to a reversal if the tech stocks that have supported it fall out of favor.
The “soft landing” story of resilient growth will be tested by the weekend’s jobs data and the start of corporate earnings season in October.
So far, the second half of the year has been “almost a mirror image of what we saw in the first half,” said Kevin Gordon, senior investment strategist at Charles Schwab. “Even if the megacaps aren’t contributing as much, if the rest of the market is doing well…I think that’s a healthy development.”
The Fed began its first rate-cutting cycle in four years earlier this month with a 50-basis point cut, a move that Chairman Jerome Powell said was meant to protect a resilient economy. Traders are pricing in the possibility of an even bigger rate cut when the central bank meets again in November, with more than 190 basis points expected to be cut by the end of 2025, according to LSEG data. .
Various sectors of the stock market are benefiting from lower interest rates and expectations for stable growth.
The S&P 500’s industrial and financial sectors, considered by investors to be the most economically sensitive areas, rose 10.6% and about 10%, respectively, in the third quarter.
Lower interest rates also provide a boost to stocks of small and medium-sized companies, which have suffered disproportionately from rising borrowing costs. The small-cap stock-focused Russell 2000 is up nearly 9% this quarter.
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As interest rates and bond yields decline, the market’s substitute bonds (high-dividend stocks) are also attracting investors seeking dividend income. Two such sectors, utilities and consumer staples, rose 18% and 8%, respectively, through the quarter.
Mark Hackett, head of investment research at Nationwide, said the expansion was based on trends that emerged before the Federal Open Market Committee on September 17-18.
“The intention was to widen participation and smooth out performance across sectors. Then the Fed cut rates more aggressively, which accelerated that trend,” he said.
“Very healthy”
Seven of the 11 S&P 500 sectors outperformed the index in the third quarter. By comparison, only the technology and communications sector, which includes Google parent Alphabet and Facebook owner Metaplatforms, outperformed the broader index in the first half of this year.
The S&P 500 index has risen more than 20% since the beginning of the year, hitting an all-time high.
Meanwhile, the overall influence of megacaps has slowed. The combined weight of the Magnificent Seven (Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta and Tesla) in the S&P 500 index has fallen to 31% from 34% in mid-July, according to LSEG Datastream.
“I think it’s extremely healthy to have some degree of technology integration,” said King Ripp, chief strategist at Baker Avenue Wealth Management. “We are by no means in a tech bear market, but we will certainly see signs of rotation.”
Investors will need to see further evidence of economic strength for the expansionary trend to continue. After the past two employment statistics were weaker than expected, the October 4 employment report will be a test of the soft landing scenario.
Market participants will also be hoping that non-tech companies report strong financial results in the coming months to justify their gains.
According to Tajinder Dhillon, senior research analyst at LSEG, the Magnificent Seven companies are expected to increase their profits by about 20% in the third quarter, compared with 2% for the rest of the S&P 500. ．Profit will increase by 5%. This gap is expected to narrow in 2025, with mega-cap groups expected to increase profits by 19% for the year, compared with 14% for the rest of the index.
Lisa Charette, chief investment officer at Morgan Stanley Wealth Management, said in a recent note that in a soft-landing scenario, the Magnificent Seven “doesn’t need to be solely responsible for the return to profitability.”
“We’re in the ‘show me’ stage for a soft landing,” Charette said.
(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Bill Berkrot)
