Wolfe Research expects the recent stock market strength to remain largely driven by mega-cap companies, with both fundamentals and sentiment continuing to favor the biggest names.
Analyst Chris Senyek noted that “by far the most common inbound question we’ve received from investors over the past few weeks has been whether we expect the market to broaden out into year-end.”
He continued, “our sense remains the rally will continue to be concentrated as fundamentals for some of the largest companies in the market are much more attractive on a relative basis.”
According to Wolfe, artificial intelligence spending remains a major force propelling the current trend. “We believe the AI spending narrative is likely to continue to drive companies most leveraged to this theme higher in the near term,” Senyek said, adding that “last week’s 3Q results from key bellwethers have come in solid.”
The firm highlighted that “the market-weighted S&P 500 is currently outperforming its equal-weighted counterpart by approximately 8.3% year-to-date,” a pattern that has been in place since 2023.
Senyek said there is “no change to this trend as market concentration, fund flows, and retail participation are likely to keep bidding up the largest companies in the near term.”
For a shift to occur, Wolfe Research argued that “we would likely need to see a sustainable shift in earnings growth for SMID indices,” referring to small- and mid-cap stocks, “which have not seen significant growth relative to the S&P 500 since mid-2022.”