Diversified Rally Signals Healthy Market Momentum

The S&P 500 has been reaching new record highs, and this time, the rally is being driven by a broader range of stocks, not just a handful of tech giants. Investors are finding opportunities in sectors like regional banks, industrials, and other areas that stand to benefit from the Federal Reserve's rate cuts and a resilient economy. This broadening of the market's participation is seen as a positive sign, suggesting the rally may have more staying power.

A Diversified Surge Signals Market Resilience

Broadening Participation Eases Concerns

The S&P 500 is on track to gain 5% in the third quarter, and this time, the optimism is not just limited to the tech-focused stocks that have already seen massive gains this year. Investors are now turning their attention to other sectors, such as regional banks, industrial companies, and other beneficiaries of a strong economy and lower interest rates. More than 60% of S&P 500 components have outperformed the index so far this quarter, compared to around 25% in the first half of the year. This broadening of the rally is an encouraging sign, as it suggests the market is not overly reliant on a handful of tech giants to drive its performance.

Equal-Weight S&P 500 Outperforms

The equal-weight version of the S&P 500, which is a proxy for the average index stock, has gained 9% in the quarter, outperforming the S&P 500 itself. This indicates that the market's gains are not being skewed by the heavily weighted shares of megacaps like Nvidia and Apple. Instead, a more diverse range of companies is contributing to the index's overall performance, which is a positive sign for the market's long-term health.

Sectors Benefiting from Lower Rates and Steady Growth

Various corners of the stock market are benefiting from the expectations of lower interest rates and steady economic growth. The S&P 500's industrial and financials sectors, which are seen as among the most economically sensitive areas, are up 10.6% and about 10%, respectively, in the third quarter. Falling rates are also a boon to shares of smaller companies, which disproportionately struggle with elevated borrowing costs. The small-cap focused Russell 2000 is up nearly 9% this quarter. Additionally, the market's bond proxies, such as utilities and consumer staples, are attracting investors seeking dividend income as bond yields fall alongside interest rates.

Megacaps' Influence Moderates

The overall influence of the megacaps, often referred to as the "Magnificent Seven" (Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla), has moderated. Their combined weight in the S&P 500 has declined to 31% from 34% in mid-July. This suggests that the market is not overly reliant on these tech giants to drive its performance, which is a positive sign for the long-term sustainability of the rally.

Soft Landing Scenario Faces Tests Ahead

Investors will likely need to see further proof of economic strength for the broadening trend to continue. The upcoming jobs data and the start of the corporate earnings season in October will be crucial tests of the "soft landing" scenario, where the economy maintains resilient growth despite the Fed's rate hikes. If non-tech firms deliver strong earnings in the months ahead, it would justify the gains seen in these sectors and further support the idea of a diversified market rally.