The dwindling ranks of the Magnificent Seven are finally getting reinforcements.
The S&P 500, Dow Jones Industrial Average and Nasdaq Composite indexes notched record highs on Wednesday and Thursday after the Federal Reserve reiterated its forecast for three quarter-point rate cuts in 2024. Investors had worried that the central bank would adjust its expectations to fewer than three cuts following a slate of hot inflation data in recent months.
But more stocks than just Big Tech have paved the way higher. The S&P 600 index, which tracks American small-cap stocks, just turned positive for the year. That's a good news for Wall Street, because smaller companies generate most of their revenue from US customers, making them bellwethers of the US economy. Small caps are often active in sectors like financials and industrials that tend to rise and fall with wider economy activity.
"When you see small-cap industrials leading, that's usually a sign that the market is saying things are on pretty firm footing here," said Ryan Detrick, chief market strategist at Carson Group.
Their participation also shows that the market's surge is extending beyond tech giants. That's a welcome sign for investors, since a broader rally begets a healthier rally. When the market's gains don't depend on just a handful of names, they're less vulnerable to pullbacks.
The rally had already begun broadening in recent weeks, before the Fed-induced euphoria. Some investors say that's because corporate earnings beats coupled with strong economic data have renewed hopes for a soft landing, or a scenario in which the Fed brings inflation down to its 2% target without triggering a recession.
About 93% of S&P 500 companies have posted fourth-quarter results, and 78% have beat earnings expectations, according to Ned Davis Research data through March 19.
"Recession" was mentioned in 47 fourth-quarter earnings calls of S&P 500 companies, the lowest count since 2021, according to FactSet data through March 7. In contrast, "soft landing" was cited on 37 earnings calls, the highest number of companies mentioning the term going back at least three years.
Meanwhile, jobs data in recent months shows that the labor market is staying resilient against interest rates hovering at a 23-year high.
That has led stocks to continue soaring after last year's powerful rally, even though shares of Tesla and Apple have fallen, while Alphabet has lagged the double-digit percentage gains notched up by Magnificent Seven peers Nvidia, Microsoft, Amazon and Meta.
Still, Detrick says that a 5% to 7% selloff wouldn't be worrisome: "Just enough to shake out those johnny-come-lately weak hands … because [the rally is] almost too easy," he said.
Wall Street could also be getting too ahead of itself by expecting such a rosy outcome for the economy, some investors say.
"It's going to be important for investors to ascertain what expectations that have been embedded are realistic and which expectations are a little bit too optimistic," said Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments.
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