Is the US Stock Market Starting to Broaden, or Will Big Tech Stay on Top?

After a shaky start to the year, the Magnificent Seven—Nvidia NVDA, Apple AAPL, Alphabet GOOG, Microsoft MSFT, Amazon AMZN, Meta Platforms META, and Tesla TSLA—are back on top. But strategists say a new broadening might be underway. And with surging bond yields and interest rates likely to rise even higher, third-quarter earnings will matter a lot for how the stock market finishes the year.

In this week’s Markets Brief:

• Will the US stock market broaden?
• High stakes for the third-quarter earnings season
• Semiconductor stocks looking set up for success

Mag 7 Success: Will There Be a Broadening?

As a group, the few largest stocks have been on a great run these past few months. The Roundhill Magnificent Seven ETF MAGS has risen 17% since late July, easily outpacing the Morningstar US Total Market Index’s 4% gain. As a result, the Mag 7’s cumulative market capitalization has climbed to a staggering $25 trillion—more than the GDP of every national economy on earth except the United States.

The tech giants have had an outsized impact on the broader market in recent months. The Mag 7 accounted for 90% of total market returns since late July, which analysts say makes the broader market more susceptible to shocks and weakness. “You tend to need to have more breadth to have a very long-lasting and sustained bull market rally,” says Jeff Buchbinder, chief equity strategist at LPL Financial.

Adam Turnquist, LPL’s chief cross-asset strategist, says recent market signals suggest that broadening may be underway. On Tuesday, when the S&P 500 closed at its first record high since August, “advancers outnumbered decliners by more than two to one,” he says.

Looking on a longer time horizon, Turnquist sees more evidence that “participation has started to improve.” The share of stocks trading at four-week highs recently climbed to its highest level in about two months, and the percentage of stocks trading above their 200-day moving average has rebounded to 50% from 42% at the end of September. Granted, that figure has averaged 67% at prior record highs in this bull market, but “the trend is at least starting to move in the right direction,” says Turnquist.

Whether the trend continues in the right direction may depend on upcoming earnings reports. “Broadening earnings [growth] could result in greater breadth and participation,” says Michael Arone, chief investment strategist for State Street Investment Management. Still, he suspects investors may need real yields to moderate before they fully buy into stocks that are more sensitive to consumer spending and the economic cycle.

Why Q3 Earnings Matter So Much for the Stock Market

Banks will kick off earnings season next week. The stakes (like share prices) are high, according to LPL’s Buchbinder. “We think there’s a little upside left in this market between now and the end of the year,” he says, “but for that to happen, you really need earnings to come through because valuation expansion is really unlikely.”

Buchbinder says the reason is interest rates. The Federal Reserve hiked rates for the first time since 2023 last month, and officials signaled a willingness to keep doing so to control stubbornly high inflation. As a result, the 10-year Treasury yield rose by a quarter point in the past month, and last week, it reached its highest level since 2002.

All else equal, higher bond yields compress stock multiples by reducing the value of future earnings. This year has been no exception. The S&P 500’s forward price/earnings ratio fell from a five-year high of 23.1 last October to 19.0 at the start of this month. (The metric has averaged 19.8 over the last five years.)

Stocks have shaken off surging yields—the S&P 500 and Nasdaq Composite indexes closed at fresh records last week—largely due to Wall Street’s expectations of another blowout earnings season. Analysts expect the S&P 500 to report third-quarter earnings per share growth of 29.5%, according to FactSet. If growth meets expectations, it will mark the index’s third consecutive quarter of growth above 25%.

After an exceptional second-quarter earnings season, when the S&P 500 grew earnings at the fastest pace since 2021, and more than 80% of companies in the index topped profit estimates, investors have grown more confident in corporate America’s earnings power. Analysts usually lower their earnings expectations over the course of a quarter, but between early July and late September, they raised their S&P 500 earnings estimates by 1.4%.

Wall Street predicts the strength will be broad-based, with all 11 sectors expected to post year-over-year earnings growth. Analysts forecast the energy sector more than doubled its quarterly profits on surging oil prices. The AI boom is expected to fuel double-digit earnings growth for the tech, communications, materials, and industrials sectors.

A Few Attractive Semiconductor Stocks

Even as questions swirl on Wall Street about the durability of the artificial intelligence trade, Morningstar analysts are optimistic about the prospects of AI semiconductor firms. They expect strong demand for chips and capital expenditure by hyperscaler firms to persist for years.

“The AI semiconductor ecosystem, led by Nvidia, should sell everything it can make in 2026 and 2027, and perhaps even more for longer,” Morningstar senior equity analyst Brian Colello and associate analyst Tucker Hawthorne wrote in a recent report. The analysts say they anticipate a slowdown in demand and profits later this decade, but for now, those two metrics continue to skyrocket. “We anticipate stellar earnings in the months ahead,” they write, pointing to Nvidia’s forecast for growth above 70% in 2027. They expect total chip industry revenue to approach $1.7 trillion in 2026.

Semiconductor stocks have had a bumpy ride this year, surging in the second quarter before leveling out in the third quarter. The Morningstar Global Semiconductors Index gained just 2% in the third quarter but is up nearly 60% since the beginning of the year.

That slowdown coincided with second-quarter earnings season, which brought strong results that didn’t translate into gains for stocks. The lackluster performance “suggests that even loftier expectations were baked into the stock prices of many chipmakers in recent months,” the analysts explain. “Beat-and-raises didn’t seem to be enough.”

One side effect of that slowdown has been falling valuations. Morningstar analysts viewed the median chipmaker as 17% undervalued as of the beginning of September, compared with 25% overvalued at the end of June. They say they see the most attractive opportunities among AI chipmakers rather than other types of semiconductors in the ecosystem. Nvidia, Marvell, and Broadcom are all trading below Morningstar’s estimates of their fair value.