The case for a market broadening is building: Morning Brief


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The S&P 500 (^GSPC) has surged over 5,000 for the first time largely due to significant increases in a few massive tech stocks.

The runs of stocks like Nvidia (NVDA), Meta (META), and Microsoft (MSFT), who are among the group that was dubbed the Magnificent Seven, have been well documented to this point. And we recently pointed out that their market dominance has made sense when considering their outsized contribution to the benchmark’s earnings projections.

If earnings are the ultimate driver of long-term stock performance, then it’s logical that the companies that contribute the most earnings growth to the benchmark will see outsized stock returns.

But the run of Magnificent Seven tech stocks leading earnings projections isn’t projected to last for all of 2024.

New research from Bank of America’s head of US equity and quantitative strategy Savita Subramanian shows the other 493 companies in the S&P 500 are expected to grow earnings by more than the Seven in the fourth quarter of 2024.

As seen in our chart of the day, the earnings recovery of the other 493 stocks would mark a significant reversal of earnings leadership in recent quarters. To Subramanian, this could signal a shift in stock market leadership too.

“We believe the narrowing growth differential will be the catalyst for the market broadening out,” Subramanian and her Bank of America colleague Ohsung Kwon wrote in a note to clients on Monday.

This earnings shift puts fundamental backing to one of the most prominent calls on Wall Street to start 2024: The stock market rally will broaden. Subramanian says this will likely come in “June or earlier.”

On top of the earnings turnaround, Subramanian also highlights the Fed’s interest rate path will play a key role in why market returns are expected to broaden. The June prediction is in line with projections from the bank’s economics team for the first rate cut to come in June.

And this speaks to a larger thread that’s formed among the folks who see a broadening coming — that the Fed’s rate path needs to be more certain first.

A construction crew pours concrete on the sixth floor of a 15-story residential apartment building in the Cobble Hill neighborhood of Brooklyn, New York, on Dec. 18, 2018. (Robert Nickelsberg/Getty Images) (Robert Nickelsberg via Getty Images)

Fundstrat head of research Tom Lee wrote on Friday that his prediction for the S&P 500 to end this year at 5,200 is “looking too conservative.” But in the shorter term Lee believes “uncertainty” around the Fed could cause investors to get anxious.

Goldman Sachs equity strategist Ben Snider recently explained a similar theory to Yahoo Finance that once investors stop “worrying so much” about when exactly the Fed will cut, the rally can broaden as investor’s come to terms with earnings expectations like those seen in Subramanian’s chart.

“If I’m looking out over the next six or 12 markets, I do think we’ll see an expansion in market breadth,” Snider said.

And it’s not about seeing the Big Tech stocks tumble, he added. “I think it’s more likely you start to see more robust performance across the remainder of the equity market.”

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