Fed rate cuts could broaden bull market beyond Big Tech

While the S&P 500 has been climbing to fresh highs in recent weeks, the number of individual stocks in the index has lagged far behind. It has raised alarms about the market’s growing reliance only on a small group of mega-cap firms.

Data from Oppenheimer & Co. shows that, at the latest breakout, just 88 more companies on the New York Stock Exchange recorded new highs than those setting new lows, as reported by Bloomberg. According to data since 1972, whenever this happens, the S&P 500 usually does worse over the next 12 months compared to times when more stocks are participating in the rally.

Much of the recent advances have come from a handful of large technology names. The so-called Magnificent Seven Index has climbed 36% from its lows in April, compared with a 25% rise for the S&P 500 as a whole.

According to strategists at Bloomberg Intelligence, only 10% of S&P 500 stocks are pushing the index higher right now. That’s much less than the usual 22% of stocks that typically drive gains from 2010-2024.

“Broader participation is important,” said Ari Wald, a senior analyst at Oppenheimer who led the study. “Rallies with most stocks taking part, both large and small, are the rallies that typically continue.”

That lack of wide support is also visible in the S&P 500’s equal-weighted version, which treats every company the same. It has not reached a new high since November 29 of last year, underscoring that many stocks remain on the sidelines.

“I thought that off of the lows, with such a ferocious run, you’d find a broader move during that period,” said Jim Paulsen who is an independent market strategist. His view reflects a broader debate over whether the market’s recent strength can extend beyond the handful of biggest names.

Fed rate cuts could broaden bull market beyond Big Tech

Traders have received mixed messages as stocks have rebounded over the past two months. On one hand, the U.S. economy is still doing well, and inflation remains under control, even with ongoing worries about trade policies. Investors have been rewarded by gains not only in the largest technology shares but also in more speculative corners of the market.

Yet worries about tariffs remain fresh. On Monday, July 7, the White House announced new levies on imports from Japan, South Africa, and South Korea set to take effect in August. The S&P 500 dipped 0.8% on the news, though it stays at less than 1% from its all-time high.

This bull market has been running for 32 months, but only a few companies are driving most of the gains. That’s making people worry that the whole market depends too much on just a handful of big names. Paulsen believes a shift by the Federal Reserve toward cutting interest rates in the months ahead could help widen participation.

“A lot of powerfully positive forces for stocks are being held up by abnormally tight Fed policy, and I think they’re getting close to changing that,” he said.

There are some signs of improvement among smaller companies. Recently, the Russell 2000 Index moved back above its 200-day average, a development Wald described as a potential bright spot.

“However, if small-caps start to fail and erase their recent improvements, it would signal the rally might be petering out and set the stage for seasonal volatility later in the third quarter,” he warned.

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