More stocks are joining the market’s rally, even as Big Tech gets the attention

It’s the latest sign that market breadth, which has been cited as a critical vulnerability by many Wall Street bears, is quietly improving after a brief lull — even as Big Tech, semiconductor stocks and the artificial-intelligence craze continue to garner the attention of most of investors, said Sam Stovall, chief investment officer at CFRA.

“It’s like a rising tide lifts all boats. There is more participation in this advance. It’s more than just the ‘Magnificent Seven.’ This euphoria seems to be lifting up all of the sectors and a majority of the industries and stocks.”

Interestingly, information technology was only the second-best-performing sector this week. That might come as a surprise to some investors after Nvidia Corp.’s
NVDA,
+0.36%
historic surge on Thursday following its latest blockbuster earnings report. The chip maker’s results sparked a global rally in shares of semiconductor stocks.

Once the dust settled on Friday, the top performer was consumer staples, a defensive sector that has substantially lagged the S&P 500 — not to mention market-beating communication services, information technology and consumer discretionary, the three sectors that are home to the “Magnificent Seven” — substantially over the past year. Consumer staples have risen 4.2% over the past 12 months, compared with 26.9% for the S&P 500.

But this week, it came out on top — helped along by companies like Costco Wholesale Corp.
COST,
+0.48%,
which rose 1.9% through Friday to a record high, according to FactSet data.

While information technology received most of the attention, it was just one of three sectors that reached new all-time highs this week; the others were healthcare and industrials. While healthcare is home to high-flying Eli Lilly & Co.
LLY,
-0.01%,
the industrials sector includes none of the top-10 stocks that have received much of the credit for driving the bulk of the S&P 500’s advance over the past year.

Looking beyond sectors and industries shows that more individual large-cap stocks are participating in the rally, according to a closely watched indicator of market breadth.

The percentage of S&P 500 constituents trading above their 50-day moving average climbed to more than 67% on Friday, according to Dow Jones Market Data. While that’s still well below the high of 91% reached on Jan. 2, it’s a notable improvement from the lowest level of the year, which was just shy of 51% on Feb. 13, according to Dow Jones Market Data.

But the improvement in the number of stocks rising isn’t limited to the S&P 500. Vincent Randazzo, head of technical research at Lowry Technical Analysis, tracks several indicators of breadth in the broader market, including midcap and small-cap companies.

The Lowry Operating Companies Only gauge measures market breadth by taking all stocks trading on the New York Stock Exchange, excluding preferred shares, closed-end bond funds and ADRs, and measuring the share of companies whose shares are rising. It also tracks the number of NYSE-traded companies trading within 2% of their 52-week highs.

For the latter measure, the percentage of midcap companies trading at or near their highs from the past year has risen to 34% as of Thursday, up from 5% when the S&P 500 hit its 52-week low in October.

Large-cap stocks have seen an even bigger turnaround: While only 4% were trading at or near 52-week highs at the low, that number had improved to 41% as of Thursday.

“The market has been getting broader under the surface, despite the fact that those big names are still working really well,” Randazzo said.

That midcap companies have joined their large-cap peers suggests that the rally can continue, Randazzo said. “You’re getting that second tier of participation as well,” he said.

However, small caps remain a potential fly in the ointment, with only 13% trading within striking distance of their 52-week highs. The Russell 2000
RUT,
one closely followed index of small-cap stocks, was down 0.8% this week, and it remains mired in the red this year to date following a short-lived but powerful rally in November and December.

Perhaps the most curious aspect of the broadening participation in the rally is that it has coincided with the adoption of more conservative expectations regarding the pace of Federal Reserve interest-rate cuts. Traders are now betting on the first cut to arrive in June, pushed back from projections earlier this year that it would happen in March, according to fed-funds futures tracked by the CME.

They have also lowered their expectations for the number of cuts before the end of the year to four, from six previously. Stocks rocketed higher in a broad-based rally beginning in November, when senior Fed officials started hinting that the central bank could remove its hiking bias from its guidance, which Chair Jerome Powell ultimately did in December. The shift provoked a furious rally that briefly saw lagging small caps outperform their Big Tech peers.

One potential explanation is the strength of the U.S. economy. According to the U.S. government’s initial estimate, GDP expanded by 3.3% during the fourth quarter. It’s expected to continue expanding at a similar pace, according to the Atlanta Fed’s GDPNow forecast, which says GDP is currently on track for 2.9% growth during the first quarter of 2024.

Inflation may have rebounded in January, but beneath the headline number, investors saw a slowing pace of goods inflation. Meanwhile, hot spots in services can be easily explained away, said James St. Aubin, chief investment officer at Sierra Mutual Funds.

“You combine that with growth being as strong as it is, and the Fed doesn’t have a reason to cut aggressively. This is a perfect scenario in a lot of ways for stocks to perform well, and not just the secular growth names like Nvidia and Microsoft,” he said during an interview with MarketWatch.

Still, St. Aubin cautioned that the top-10 stocks still represent roughly 30% of the S&P 500’s total market capitalization, which is higher even than at the peak of the dot-com bubble.

“Breadth was pretty good in the fourth quarter, then early in the first quarter it got weak, [and] now it seems to be coming back a little bit,” St. Aubin added. “But extreme concentration is still a thing.”

The S&P 500 rose 1.7% this week to 5,088.80, its largest weekly advance since Jan. 12, according to Dow Jones Market Data. The Nasdaq Composite
COMP
gained 1.4% to 15,996.82. The Dow Jones Industrial Average
DJIA,
meanwhile, gained 503.54 points, or 1.3%, to 39,131.53.