S&P 500 Nears All-Time High Amid Broadening Rally, with Smaller Stocks Leading the Charge
The S&P 500 is approaching its all-time high, buoyed by an expanding rally that now includes a broader range of stocks beyond the tech giants. On the heels of eight consecutive daily gains, the index shows signs of a healthy and diverse market, with the equal-weight version of the S&P 500 hitting a new all-time high. This broadening rally is further evidenced by the Russell 2000 small-cap index, which saw a notable 1.2% increase.
Investors are increasingly optimistic about the Federal Reserve’s potential rate-cut cycle, spurred by better-than-expected economic data. As inflation fears diminish, attention is shifting towards the Fed’s upcoming September meeting, where a rate cut could be on the horizon. This anticipation has led to a surge in risk assets, with market sentiment favoring a scenario where the economy slows without slipping into a recession.
Economic Indicators Signal Strength
The Fed’s restrictive monetary policy, which aimed to curb inflation from its June 2022 peak, seems to have achieved its goal. The Consumer Price Index (CPI) and the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) index, are both now hovering around 2%. Despite concerns that lower inflation rates do not translate to lower prices, the economy has avoided a recession, thanks in part to robust wage growth and targeted fiscal stimulus, particularly for lower-income workers.
Real wage growth has played a critical role in sustaining consumer purchasing power, which in turn supports ongoing economic expansion and the current bull market. Indeed, data from job listings on sites like Indeed show that wage growth has consistently outpaced inflation, ensuring that real consumer spending remains stable. This sustained purchasing power is crucial for the continued health of the economy and stock market.
Market Breadth and Economic Outlook
The market’s breadth is also improving, with smaller stocks and sectors outside of technology beginning to lead the rally. This trend is indicative of the market moving into the middle innings of the bull market, where a rotation from technology leaders to laggards is becoming more apparent. As the initial euphoria around artificial intelligence cools, profit-taking in tech has opened the door for other sectors to gain traction.
The recent revision to job growth estimates has sparked debate among market observers, with some predicting a large downward adjustment. However, the impact of such revisions on economic growth is minimal, as consumer spending remains the primary driver of the economy. The focus remains on forward-looking indicators, with the market serving as a discounting mechanism that anticipates future economic conditions.
As the Fed potentially shifts towards a more dovish stance, and with inflation continuing to ease, the stage is set for a modest increase in real incomes. This, in turn, is expected to prolong the economic expansion, further fueling the current bull market. While gains in major market indices may slow as larger companies weigh on performance, the improvement in market breadth suggests that the uptrend is likely to continue.
