The Surprising Stock Market Rally : Moving Beyond Tech

The major criticism of the 2023 stock surge is that it is based on a handful of corporations that profit from hype. That critique has recently suffered.

The best week for small-caps since March and a thrashing of the S&P 500 by a version of the same index that removes market-value biases were hints of an increasingly equitable split of rewards this week beneath another rollicking gain. Previously lagging sectors including transportation, real estate, and energy took the lead this time.

The notion that gains would spread out after being restricted to an oligarchy of artificial intelligence mega caps has been a prong in bull cases all year. This week, a slew of economic indicators that one again suggested a recession is still some time off gave the notion more traction. Nine out of ten S&P 500 constituent stocks rose as a result, helping stocks of all colours. For the greatest week since January, the equal-weighted version of the index outperformed the traditional one by 1 percentage point.

In the first half of the year, the tech-heavy Nasdaq 100 rose by about 40%, recovering the majority of its 2022 losses. The benchmark S&P 500 Index increased by around 16% thanks to a few of its largest stocks, which are participants in the race for artificial intelligence. The Russell 2000, which is frequently used as a gauge of small-cap health, experienced a more modest gain of 7.2%.

Not just Muhlenkamp is making purchases. According to statistics gathered by Bloomberg, Invesco S&P 500 Equal Weight ETF (ticker RSP) is on track to receive a record inflow of around $5 billion for the month of June. Over the same period, the Russell 2000 ETF (IWM) acquired about $1.8 billion in new capital, making it on course to receive the biggest infusion of capital since February 2021. For the first month of this year, the Russell 2000 outperformed the Nasdaq thanks to the confidence.

Wall Street did not forecast a $6 trillion rally in 2023. Bloomberg-tracked strategists predicted that the S&P 500 would close the year at 4,050 back in January.

Even if there is still time for their predictions to come true, it’s important to note that the index is currently 400 points over that objective.
Although a study released on Friday indicated that consumer spending was static and that inflation was slowing, earlier figures on the gross domestic product, new house sales, and durable goods orders all exceeded expectations.

Overall, since early April, a Bloomberg index that tracks economic surprises has increased in all but two weeks and has already climbed to its highest point in more than two years.

The resoluteness and Jerome Powell’s indications of two additional rate increases in 2023 spurred a rise in Treasury yields. But unlike in 2022, when the thought of increased borrowing prices sent stocks into a tailspin, this is now seen as support for the notion that a recession, which is widely expected, is not an impending threat.

According to Lauren Goodwin, an economist and portfolio manager at New York Life Investments, “it’s adding to the narrative.” “An expansion of economic performance can bolster confidence in an expansion of equity market performance.”

A growing economy has led to a reduction in volatility across the board, not just in stock prices. A gauge of cross-asset risk that Bank of America has been tracking has progressively decreased in 2023, with the exception of a spike during the March banking crisis. According to John Kolovos, chief technical strategist at Macro Risk Advisors, the low implied volatility supports the optimistic thesis.

Obviously, how investors feel towards the conclusion of the first half of 2023 depends on what they decide to focus on, be it an inverted yield curve, a spike in the Nasdaq, a change in central bank policy, or something else entirely. Additionally, a strong month for smaller businesses does not guarantee that markets are safe, that a recession won’t happen, or that the S&P 500 will possibly reach its 2022 highs.

But according to Kolovos of Macro Risk Advisors, it’s still a pattern worth noting.

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