The U.S. stock market’s rally is showing signs of broadening, providing a boost of optimism for investors who have been concerned about an over-reliance on technology shares. As the Federal Reserve’s anticipated rate cuts approach, and key jobs data is awaited, the rally appears to be extending beyond the tech-heavyweights that have driven much of the market’s gains this year.
For several months, the market’s performance has been closely tied to major tech stocks such as Nvidia and Apple. However, recent developments indicate a more diverse rally. Investors are now turning their attention to value stocks and small-cap companies, which stand to benefit from a potential reduction in interest rates. The Fed is expected to begin a rate-cutting cycle at its monetary policy meeting on September 17-18, which could further invigorate these sectors.
Liz Ann Sonders, Chief Investment Officer at Charles Schwab, noted that the trend of broadening market participation is encouraging. “No matter how you slice and dice it, you have seen a pretty meaningful broadening out and I think that has legs,” she said. This shift comes as the broader market has recently outperformed the tech giants, with 61% of S&P 500 stocks surpassing the index’s performance over the past month.
The so-called Magnificent Seven tech giants, including Nvidia, Tesla, and Microsoft, have seen their performance lag behind the remaining 493 stocks in the S&P 500 by 14 percentage points since a weaker-than-expected U.S. inflation report in July. Despite Nvidia’s forecast falling short of high investor expectations earlier this week, the market’s resilience suggests a growing interest in other sectors.
Value stocks, such as General Electric and Targa Resources, have seen notable gains this year, with increases of 70% and 68% respectively. The Russell 2000 index, which focuses on small-cap stocks, has risen 8.5% from its recent lows, signaling potential further growth.
The upcoming non-farm payrolls report, scheduled for release next Friday, is expected to be a significant market mover. A steady yet not alarming pace of labor market cooling could reinforce the case for a broadening market rally, according to David Lefkowitz, Head of U.S. Equities for UBS Global Wealth Management.
While the rotation towards value stocks and small caps is gaining traction, technology remains a key driver of market growth. Analysts at LSEG predict that technology stocks will continue to outperform with above-market earnings growth through 2025. Jason Alonzo, a portfolio manager at Harbor Capital, emphasized that while investors may explore other opportunities, technology—especially driven by artificial intelligence—remains a crucial growth engine.
As the market awaits both the Fed’s decisions and critical economic data, the current rally’s broadening scope offers a positive signal for diverse investment opportunities, suggesting a potential shift towards a more balanced market landscape.
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