By José Adinolfi
Nvidia's blockbuster earnings report helped all 11 S&P 500 sectors finish the week in green for the first time this year.
A rally in Big Tech stocks received most of the credit for driving global markets higher this week. But in the United States they couldn't have done it without a little help from their friends.
As the S&P 500 SPX posted its best weekly gain since early January, one detail stood out this week: All 11 sectors of the large-cap index managed to finish in the green for the first time since November, according to Dow Jones Market Data. The S&P 500 notched its 13th record close of 2024 on Friday, even as information technology stocks and other sectors associated with Big Tech ended the session in the red, according to FactSet data.
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 companies, semiconductor stocks and the Artificial intelligence continues to attract the attention of the majority. of investors, said Sam Stovall, CFRA's chief investment officer.
"It's like a rising tide is lifting all boats. There is more involvement in this development. It's more than just the 'Magnificent Seven'. This euphoria seems to be lifting all sectors and most industries and stocks."
Interestingly, information technology was only the second-best performing sector this week. This might come as a surprise to some investors after Nvidia Corp.'s (NVDA) historic surge on Thursday following its latest blockbuster earnings report. The chipmaker's results sparked a global rally in semiconductor stocks.
Once the dust settled on Friday, the best-performing sector was consumer staples, a defensive sector that has substantially lagged the S&P 500, not to mention communication services, information technology and consumer discretionary, the three sectors that house the "Magnificent Seven", substantially over the past year. Consumer staples have risen 4.2% over the past 12 months, compared to 26.9% for the S&P 500.
But this week it prevailed, helped by companies like Costco Wholesale Corp. (COST), which rose 1.9% through Friday to an all-time high, according to FactSet data.
While information technology received most of the attention, it was just one of three sectors that hit new all-time highs this week; the rest were healthcare and industrial. While healthcare is the home of Eli Lilly & Co. (LLY), the industrials sector does not include any of the top 10 stocks that have received much of the credit for driving most of the S&P 500's advance over the past year. .
S&P 500 Sector Gain during week ended Feb. 23 Consumer Staples 2.1% Information Technology 2% Materials 1.9% Industrials 1.8% Financials 1.6% Consumer Discretionary 1.54% Health Care 1.51% Communication Services 1.49% Utilities 1.2% Real Estate 0.9% Energy 0.4%
Looking beyond sectors and industries shows that more individual large-cap stocks are participating in the rally, according to a closely watched market breadth indicator.
The percentage of S&P 500 constituents trading above their 50-day moving average rose to more than 67% on Friday, according to Dow Jones Market Data. While it is still well below the high of 91% reached on January 2, it is a notable improvement from the lowest level of the year, which was just below 51% on February 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 breadth indicators in the broader market, including mid- and small-cap companies.
Lowry Operating Companies Only measures market breadth by taking all stocks listed on the New York Stock Exchange, excluding preferred stocks, closed-end bond funds and ADRs, and measuring the share of companies whose shares are rising. It also tracks the number of NYSE-listed companies that are trading within 2% of their 52-week highs.
By the latter measure, the percentage of mid-cap companies trading at or near their highs from last 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 swing: 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 expanding beneath the surface, even though those big names are still doing very well," Randazzo said.
The fact that mid-caps have joined their large-cap peers suggests the rally may continue, Randazzo said. "You'll also get that second level of involvement," he said.
However, small caps remain a potential headwind, with only 13% trading within striking distance of their 52-week highs. The Russell 2000 RUT, a closely watched small-cap stock index, is down 0.8% this week and remains stuck in the red so far this year after a brief but powerful rally in November and December.
Perhaps the most curious aspect of the growing share of the rally is that it has coincided with the adoption of more conservative expectations regarding the pace of the Federal Reserve's interest rate cuts. Traders are now betting that the first cut will come in June, lagging projections earlier this year that it would happen in March, according to federal 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 soared in a broad-based rally that began in November, when top Fed officials began hinting that the central bank might remove its bullish bias from its guidance, which Chairman Jerome Powell finally did in December. The shift sparked a furious rally in which lagging small-cap companies briefly outperformed their Big Tech peers.
One possible explanation is the strength of the US economy. According to the US government's initial estimate, GDP grew by 3.3% during the fourth quarter. It is expected to continue expanding at a similar pace, according to the Atlanta Fed's GDPNow forecast, which says GDP is currently on track to grow 2.9% during the first quarter of 2024.
Inflation may have picked up in January, but below the headline number, investors saw a slowdown in the pace of goods inflation. Meanwhile, the pain points in the services can be easily explained, said James St. Aubin, chief investment officer at Sierra Mutual Funds.
"If you combine that with growth as strong as it is, the Fed has no reason to cut aggressively. This is a perfect scenario in many ways for stocks to do well, and not just secular growth companies like Nvidia and Microsoft," he said during an interview with MarketWatch.
Still, St. Aubin cautioned that the top 10 stocks still account for about 30% of the S&P 500's total market capitalization, which is even larger than at the peak of the dot-com bubble.
"Amplitude was quite good in the last quarter, but at the beginning of the first quarter it weakened. [and] Now it seems like it's coming back a little bit," St. Aubin added. "But extreme concentration still exists."
The S&P 500 rose 1.7% this week to 5,088.80, its biggest weekly gain since Jan. 12, according to Dow Jones Market Data. The Nasdaq Composite COMP gained 1.4% to 15,996.82. Meanwhile, the Dow Jones Industrial Average DJIA gained 503.54 points, or 1.3%, to 39,131.53.
-Jose Adinolfi
This content was created by MarketWatch, operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.
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