The rise in US stocks is no longer a “standout” for technology stocks. Market breadth indicators have improved markedly. After the collective rise in cyclical stocks, the next step is the small to medium market turn?

On March 31, Ryan Detrick, chief market strategist at Carson Group, released data showing that the number of S&P 500 stocks that recently hit a 52-week high reached 118, the highest in three years, indicating that the breadth of the market continues to improve.

According to Dow Jones market data, more constituent stocks in the S&P 500 index have entered a long-term upward trend. As of the last trading day of March, the proportion of stocks with closing prices above the 200-day moving average was over 83%, the highest since August 2021.

The S&P 500 index has reached a record high 22 times so far this year, reaching 10.79% in the first quarter. The AI boom has become a key force driving up the stock market, but its influence has weakened compared to 2023.

Howard Silverblatt, a senior index analyst at the S&P Global Index, pointed out that the data showed that the US “Big Seven Tech” stocks contributed 37% of the S&P 500 index's increase in the first quarter. Meanwhile, in 2023, the “Big Seven Tech” boosted the S&P 500 index's rise by about two-thirds.

Alex Kuptsikevich, senior market analyst at FxPro, said in a report that the gains of the “Big Seven” in March this year were affected by the decline of Apple and Tesla, and the performance of Amazon and Meta also lagged behind the S&P 500 index.

As a whole, the “Big Seven Tech” gradually came to an end in March, rising only 1.6% by market capitalization, the worst performance since December last year, while the S&P 500 rose 2.2%.

Analysts believe that cyclical industries, such as industry, finance, and energy, performed well in March and the first quarter, making up for the impact of the slowdown in the rise of large technology stocks, which indicates that market leadership is spreading and is no longer overly dependent on a specific industry.

Cyclical industries are starting to drive gains in US stocks

In an interview with the media, Detrick said that the key to the bull market is sector rotation. “Now, we have seen part of the capital rotate from technology stocks to some cyclical stocks.”

In the past month, energy, finance, raw materials, and industry have performed well. Energy rose more than 12% in the first quarter, finance rose nearly 12%, and industry rose more than 10%. If interest rate cuts are implemented, the cyclical sector is expected to expand profit opportunities along with interest rate cuts.

US stock strategist Bret Kenwell at eToro said that the cyclical industry has recently risen to record levels, which bodes well for US stocks to continue to strengthen. Kenwell said:

“Seeing record highs in industrial stocks and financial stocks is no sign of a bear market.”

As an economic barometer and weather vane, the financial sector, which was greatly affected by monetary policy, performed well in the first quarter. Peter Tuz, president of Chase Investment Counsel, pointed out that he recently bought Goldman Sachs and oil service companies while reducing his positions in tech giants, including Apple. “The breadth of the market is expanding, and I see that this year there are more effective ways to make money than buying or holding the Big Seven.

Bank of America said that the Federal Reserve's information on interest rate cuts and quantitative austerity (QT) helps bank stocks perform well in the first quarter profit results announced in mid-April. “The Fed's bitmap retains three interest rate cuts and repeatedly mentions' soon 'when discussing the timing of QT cuts. Increased confidence in easing monetary policy may cause the market to reduce the probability of a tail risk event, while increasing the possibility of bank stocks repeating the 1995 'soft landing'.”

Are small to medium cap stocks next?

As the Federal Reserve gradually approaches interest rate cuts, fund managers expect that small and medium capitalization stocks may be favored again and may soon take the lead again.

The data shows that for its part, the S&P Mid Cap 400 Index is approaching a new high. According to FactSet, the index closed at 3046.36 points in March, a record high. Since the beginning of the year, the index has risen 9.5%, almost the same as the S&P 500 index.

However, small-cap stocks continued to lag behind. According to FactSet data, the Russell 2000 Index is still 12% below the closing record set in November 2021. The Russell 2000 Index closed at 2,124 points in March, up 3.2% in the same month, and has risen 4.8% year to date.

Barbara Reinhard, chief investment officer of Voya Investment Management's multi-asset strategy and solutions platform, said that the rise in small-cap stocks requires the Federal Reserve to cut interest rates decisively.

Morningstar Wealth's analysis of data from the 1970s shows that during a period of accelerated economic growth and slowing inflation, US small-cap stocks performed better than large-cap stocks. The Russell 2000 index had an annualized increase of 25.2%, while the S&P 500 had an annualized increase of 17.3%.

Editor/Somer