The US stock market is experiencing a welcome shift, as a broader range of companies are driving the S&P 500’s surge to record highs. This marks a departure from the earlier trend, where a select few tech giants dominated the market’s gains. As the Federal Reserve’s rate cuts take effect, investors are increasingly optimistic about the prospects for economic growth, and are pouring money into shares of regional banks, industrial companies, and other beneficiaries of a strong economy.
In the third quarter, over 60% of S&P 500 components have outperformed the index, a significant improvement from the first half of the year, when only around 25% of stocks did so. The equal-weight version of the S&P 500, which gives a more accurate picture of the average stock’s performance, has gained an impressive 9% in the quarter, outpacing the main index.
This broadening of the rally is a reassuring sign for investors, who had grown concerned that the market was overly reliant on a handful of tech heavyweights. The “soft-landing” narrative, which predicts a resilient economy with steady growth, will be put to the test in the coming weeks, with key employment data and corporate earnings reports due out.
The Federal Reserve’s recent rate cut, and expectations of further reductions, have boosted investor sentiment, particularly in sectors that are most sensitive to changes in interest rates. Industrial and financial stocks, for example, have surged over 10% in the quarter, while smaller companies, which often struggle with high borrowing costs, have seen their shares rise nearly 9%.
The market’s bond proxies, such as utilities and consumer staples, are also attracting investors seeking dividend income, as bond yields fall alongside interest rates. Seven of the S&P 500’s 11 sectors are outperforming the index in the third quarter, a marked improvement from the first half of the year, when only two sectors did so.
While the influence of the megacaps, such as Apple and Amazon, has moderated, they are still expected to deliver strong earnings growth in the third quarter. However, investors will be looking for signs of strength from other sectors to justify the market’s gains. As one analyst noted, “We’re in the ‘how me’ stage for the soft landing,” and the coming weeks will be crucial in determining whether the market’s optimism is justified.
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