The Stock Market Is Broadening. It Still Has A Long Way to Go.

The stock market has been on a rollercoaster ride in recent years, with tech stocks leading the charge. However, there are signs that the market is broadening, with more sectors and stocks participating in the rally. This is a positive development, as it indicates that the market is becoming more diverse and resilient. However, it is important to note that the market still has a long way to go before it can be considered truly broad-based.

One of the key indicators of market breadth is the number of stocks participating in the rally. In recent months, there has been a broadening in market leadership beyond the tech sector, with industrials, utilities, health care, and small-cap companies also participating in the rally. This trend aligns with the overall market performance, as seen in the following examples:

* As of Monday, January 27, 2025, about 70% of S&P 500 constituents rose, even as the index fell 1.5% (Barclays strategists).
* The S&P 500 growth index, which is heavily populated by tech stocks, dropped about 3.6% on Monday, while the counterpart value stock index rose nearly 1% (LSEG data).
* The equal-weighted S&P 500, which disfavors concentration, has moved up at a slower clip than its parent index both YTD and in the last month as companies reported their quarters (Target Allocation team).

These trends indicate that the market is broadening, with more sectors and stocks participating in the rally, aligning with the overall market performance.

However, it is important to note that the market still has a long way to go before it can be considered truly broad-based. While the Magnificent Seven tech stocks have accounted for 55% of the S&P 500's total return since the end of 2022, the overall market performance has been driven by a narrow group of stocks. In order for the market to be truly broad-based, more sectors and stocks need to participate in the rally.

One of the key drivers of the market's broadening is the strong earnings growth of tech+ companies. According to Bloomberg data, over 70% of both the information tech and communications sectors had positive earnings growth YoY in the first half of 2024. The tech sector reported a 26% improvement in earnings versus S&P 500 ex-technology earnings falling by 3% (Michael Gates, Lead Portfolio Manager, Target Allocation). This strong earnings growth has helped drive the overall market performance, as investors continue to seek exposure to leading companies in well-recognized areas like AI and tech+ (Julian Abdey, Equity Portfolio Manager).

In addition to strong earnings growth, strategic acquisitions and organic growth strategies have played a significant role in the broadening of the stock market. For example, Microsoft's acquisition of LinkedIn and Amazon's acquisition of Whole Foods Market have helped these companies expand their market reach and drive growth. Similarly, Apple's expansion into services and Alphabet's focus on AI and machine learning have helped these companies maintain their competitive edge in the tech industry and drive growth.

In conclusion, the stock market is broadening, with more sectors and stocks participating in the rally. This is a positive development, as it indicates that the market is becoming more diverse and resilient. However, it is important to note that the market still has a long way to go before it can be considered truly broad-based. Strong earnings growth, strategic acquisitions, and organic growth strategies have all played a significant role in the market's broadening, and investors should continue to seek exposure to leading companies in well-recognized areas like AI and tech+.