Wall Street investors look beyond tech for next phase of stock market's rally

By Joy Wiltermuth

Investors are taking cues from Main Street's thriftier vibe, helping the stock rally broaden out beyond tech giants

The stock market appears to be taking cues from the thriftier vibe on Main Street.

Corporate earnings and economic data show that while consumers have kept spending, they're focused on getting the biggest bang for their buck and holding out on big-ticket purchases until the Federal Reserve cuts interest rates.

A similar dynamic appears to be playing out on Wall Street. The S&P 500's equal-weight index XX:SP500EW - which aims to be "size neutral" by allotting each company in the index equal footing by market capitalization - hit a fresh record high on Monday.

"It's telling you the rally is broadening out," said Robert Pavlik, a senior portfolio manager at Dakota Wealth Management. After a big rally in the "Magnificent Seven" tech stocks earlier this year, investors appear to be hunting for bargains in other areas of the market, he noted.

The traditional S&P 500 index SPX, a market-capitalization-weighted gauge, has benefitted greatly in 2024 from optimism around artificial intelligence. AI darling Nvidia Corp. (NVDA) at midyear had added $1.8 trillion in market cap, dwarfing the influence of other companies in the index such as retailer Etsy Inc. (ETSY), which has a roughly $6.2 billion market cap.

Both the S&P 500 and its equal-weighted version were taking a breather on Tuesday from the rally, along with the Dow Jones Industrial Average DJIA and Nasdaq Composite Index COMP. The S&P 500 closed Monday only 0.7% off its prior record finish in mid-July, according to Dow Jones Market Data.

"The Magnificent Seven will still be contributing to earnings, but the proportion as compares with other areas of the equity complex is going to be less," said Brian Vendig, chief investment officer at MJP Wealth Advisors.

He attributed that to expectations that companies outside of tech will benefit from normalized supply chains in the wake of the pandemic, moderating wage growth and changes made to corporate balance sheets and business models.

"It's not to say that tech is a bad place to be because they've had a big run," Vendig said. "But there are other companies experiencing earnings growth."

The S&P 500's blended earning growth rate, which includes actual results and estimates, was pegged at 10.9% in the second quarter, according to John Butters, senior earnings analyst at FactSet Research. When excluding the "Magnificent Seven" companies, the blended earnings growth rate for the other 493 companies was 6.2%.

Picking more winners?

There's no disputing that Apple Inc., (AAPL) Amazon.com Inc., (AMZN) Microsoft Corp., (MSFT) Nvidia Corp., Alphabet Inc., (GOOG) (GOOGL) Meta Platforms Inc., (META) and even Tesla Inc. (TSLA) have helped drive the stock market higher in recent years.

At their peak in July, the group of seven stocks had a record high $17 billion market cap, accounting for 34% of U.S. market value, according to BofA Global.

See: No, Walmart isn't seeing a weaker customer, so far

In the months ahead, they might not be the only winners. "I think we are seeing a regime shift that started playing out a month ago," said Craig Sterling, head of equity research at Amundi U.S., in an interview, about signs of an earnings recovery outside of the stock market's small group of highflying tech companies.

"It's fits and starts," Sterling said. "But I think earnings are going to help provide the engine for that."

Sterling's outlook has earnings growth starting to decelerate for the "Magnificent Seven" next year, but for it to pick up for the rest of the S&P 500 stocks, in a scenario where the U.S. avoids a recession.

Other factors, including mixed economic data, a heated White House race and expectations for Fed rate cuts, have been front of mind for investors.

Check out: Fed's Jackson Hole meeting: A plan to cut rates gradually is emerging

Using history as a guide, it's when you come out of a downturn where corporate earnings tend to really start to broaden out, said Crit Thomas, global markets strategist at Touchstone Investments.

"Today, we are sort of looking at a soft landing scenario," Thomas said, adding that it's too early to tell if the Fed ends up cutting rates because inflation continues to ease, or if the economy winds up needing help. "There are a lot of things we don't know."

Related: Kamala Harris wants to ban price gouging by grocery stores. Some skeptics aren't buying it.

"We go where valuation leads us," said Sterling at Amundi. "For companies, there has to be a path to value."

-Joy Wiltermuth

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08-20-24 1539ET

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