Is the S&P 500 bull market finally expanding? Ed Yardeni reviews

Investing.com — The strong rally in US equities has been led by the so-called Magnificent Seven since the start of the bull market in October 2022.

Led by their strong rally, the tech-heavy Nasdaq 100 index has risen nearly 118% since the start of this bull run. This increase easily outpaced other indicators.

Yardeni Research said in Tuesday's report: “The Magnificent Seven's market capitalization share within the S&P 500 has doubled, from 16% to 32% during the current bull market.”

However, this concentration does not mean that the rest of the market counts in place. Yardeni Research notes that with the S&P 493, medium and small-sized companies also posted strong gains, but they were not as glamorous as mega-corporations.

There have been more signs in recent weeks that participation is expanding. The percentages of S&P 500 companies that showed positive quarterly changes in their forward-looking revenues and earnings “increased significantly.” This suggests that the S&P 493 could benefit in the future.

Yardeni also highlights the different paths between larger companies and their smaller counterparts. The S&P 1000 SmidCaps have been lagging since 2022, impacted by years of underperformance dating back to the mid-2010s.

These companies have risen recently on expectations of an interest rate cut by the Federal Reserve. But Yardeni cautions that this trend may be temporary.

The firm wrote: “We are not convinced that they will outperform the S&P 500 sustainably. However, we prefer to take some of the profits in our preferred large-scale industries and redirect them to SmidCap equivalents with lower valuation multipliers.”

The report also draws parallels with the late 1990s, when the Fed's interest rate cuts during the Long-Term Capital Management crisis helped inflate the Technology Bubble.

Another rate cut is expected at the FOMC meeting on September 17. That could revive what Yardeni called a “Fed Put” and trigger another rapid rise in stocks.

Nevertheless, this time the background is different. Yardeni notes that the forward earnings contribution of technology and communications services to the S&P 500 total is currently 36.9%. The rate was 24% at its peak in 2000. This suggests that the fundamentals are more solid than they were in the dot-com era.

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