The U.S. equity rally that began in October 2022 has largely been driven by the so-called Magnificent Seven. Their stellar performance has propelled the tech-heavy Nasdaq 100 index to surge nearly 118% since the bull market’s inception, far outpacing other benchmarks.
“The Mag-7’s market capitalization share of the S&P 500 has doubled during the current bull market from 16% to 32%,” Yardeni Research noted in a report on Tuesday, highlighting the outsized influence of these mega-cap stocks.
However, the rest of the market has not remained idle. Yardeni Research points out that the broader S&P 493, along with mid- and small-cap stocks, have also seen solid gains, even if they have not captured the same level of attention as the largest companies.
Recent weeks have hinted at a potential broadening of participation. The share of S&P 500 companies showing positive three-month changes in forward revenues and earnings “have increased significantly,” suggesting that the S&P 493 could see more momentum in the near term.
Yardeni also notes a divergence between large-cap stocks and their smaller peers. Since 2022, the S&P 1000 SMidCaps have lagged, weighed down by years of underperformance going back to the mid-2010s. These stocks have rebounded recently amid expectations of Federal Reserve easing, but Yardeni warns that the recovery may be short-lived.
“We aren’t convinced they are set to outperform the S&P 500 on a sustainable basis. However, we would take some of the profits in the large-cap sectors we’ve favored and rotate into their SMidCap equivalents, which have lower valuation multiples,” the report said.
The analysis draws parallels with the late 1990s, when Fed rate cuts during the Long-Term Capital Management crisis contributed to the Tech Bubble. Another rate cut is widely anticipated at the September 17 FOMC meeting, potentially reviving what Yardeni calls the “Fed Put” and sparking another surge in equities.
Yet, the environment differs this time. Technology and communication services now account for 36.9% of forward earnings in the S&P 500, compared with 24% at the peak of the 2000 bubble, indicating that fundamentals are stronger than during the dot-com era.
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