Two more stock indexes are on track for records: What that means for the bull market

By Joseph Adinolfi

'Things continue to broaden under the surface, which tells us there are plenty of opportunities outside of the super high-momentum names,' analyst says

Another two U.S. equity indexes are poised to reach record territory for the first time in more than two years, indicating that more U.S.-listed stocks are joining a rally that has been criticized for its dependence on Big Tech.

The S&P 400 MidCap Index MID is poised to close in record territory on Monday for the first time since Nov. 16, 2021. Meanwhile, the Invesco S&P 500 Equal Weight exchange-traded fund RSP, which tracks the S&P 500 Equal-Weighted Index, also appears headed for its first record close since Jan. 4, 2022, according to Dow Jones Market Data. The equal-weighted index itself was still a few points shy of record territory as of midday on Monday.

See: more stocks are joining the market's rally - even as Big Tech still gets the most attention

These indexes' rise to record highs represents the culmination of what has been a long, slow slog higher for equity indexes besides the S&P 500 SPX, Nasdaq-100 NDX and Dow Jones Industrial Average DJIA, market strategists said.

Along with the Dow, indexes that didn't have as much exposure to the leading stocks were left in the dust last year as a handful of the most valuable S&P 500 issues - including members of the group of tech stocks known as the Magnificent Seven, along with Berkshire Hathaway Inc. (BRK.B), Eli Lilly & Co. (LLY) and Broadcom Inc. (AVGO) - drove the bulk of the S&P 500's 24.2% advance.

The Magnificent Seven includes artificial-intelligence darling Nvidia Corp. (NVDA)- the best-performing stock in the S&P 500 over the past 12 months, having gained more than 260% during that time - along with Meta Platforms Inc. (META), Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Apple Inc. (AAPL), Alphabet Inc. (GOOGL) and Tesla Inc. (TSLA)

This latest market milestone represents the latest in a string of records for equity indexes both in the U.S. and around the world, as stocks in Japan and Europe recently reached record highs. On Friday, the S&P 500 recorded its 15th record high of 2024 and the Nasdaq Composite recorded its second. Japan's Nikkei 225 JP:NIK, which took out its record from 1989 last month, topped 40,000 for the first time ever on Monday.

Also read: Japan's benchmark Nikkei 225 tops 40,000 for first time, lifted by tech stocks

Market strategists heralded this as confirmation that the bull market in U.S. stocks likely has more room to run, even as the S&P 500 appears to be due for a pullback following a historic four-month sprint higher.

After a slow start to the year, the share of S&P 500 stocks trading at 52-week highs has climbed as high as 18% over the past couple of weeks, according to Jonathan Krinsky, chief market technician at BTIG - well above the 2024 low of 2% from early January.

"Things continue to broaden under the surface, which tells us there are plenty of opportunities outside of the super high-momentum names," Krinsky said during a phone interview with MarketWatch.

U.S. equity-market performance started to broaden out in early November following a three-month selloff for the S&P 500. Stocks, including neglected small-caps, shot higher in November and December as senior Federal Reserve officials signaled that the central bank could soon start cutting interest rates, a message that was driven home by Federal Reserve Chair Jerome Powell at the central bank's December meeting.

Although gains for these laggards fizzled early in 2024, indexes tracking small-caps have shown signs of life over the past couple of weeks. The Russell 2000 RUT, a broad index of U.S.-traded small-cap stocks, was poised for a fresh 52-week high on Monday as two stocks - chip maker Super Micro Computer Inc. (SMCI) and bitcoin-focused MicroStrategy Inc. (MSTR) - drove nearly all of its gains, according to FactSet data. The Russell was up 0.5% at 2,086 in recent trading.

Many stock-market strategists believe the market needs to broaden for the S&P 500 to continue its ascent. A team of equity analysts at Bank of America said they expected market breadth to continue to improve in a note in which they raised their year-end target for the S&P 500 to 5,400.

See: Bank of America boosts S&P 500 target to 5,400. Here's how it got there.

Unlike the traditional S&P 500 index, which allots a heavier weighting to more valuable stocks, the equal-weight version of the index applies a fixed weighting for each issue included in the index.

This methodology worked against the equal-weighted index last year by helping to mitigate the gains from the Magnificent Seven group of megacap stocks, which caused the index to underperform its market-cap weighted sibling by the widest margin in two decades. It finished last year up just 11.7%, according to FactSet data, with the bulk of the gain coming during the fourth quarter.

Since then, analysts have been keeping a close eye on the equal-weight index, looking for confirmation that the S&P 500's momentum can continue after the index rose 21% over the past four months and clinched a spate of weekly gains not seen since the early 1970s.

See: S&P 500 scores gains last seen in 1971 as AI hopes fuel 'second' leg of rally

Why is improving breadth so important for equity bulls? Vincent Randazzo, head of technical research at Lowry Technical Analysis, offered an analogy.

"The way I like to think about breadth is sort of like, if you've got a bunch of horses pulling a wagon, the more horses you have, the farther you can go and the faster you can go," Randazzo said during an interview with MarketWatch. "Whereas if you only have a couple of horses, at some point they are going to get tired, and you're not going to go as far."

Both the S&P 400 midcap index and the RSP ETF, which tracks the equal-weight S&P 500, were trading higher on Monday, while the S&P 500 was little-changed and the Nasdaq Composite and Dow traded lower.

-Joseph Adinolfi

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03-04-24 1332ET

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