A resilient U.S. economy is giving investors increased confidence to move beyond the “Magnificent Seven” tech stocks and into corners of the market that had lagged. This broadening trend has helped lift non-tech stocks and represents a positive development for the market over the long run. Over the past month, a notable shift in performance has occurred among the 11 sectors of the S & P 500 . Classic cyclical sectors — including Materials and Industrials — outperformed after trailing the tech sector to start the year. Conversely, the stars of the market last year and again to start 2024, the information technology and communication services sectors, have taken relative back seats. Materials was the top-performing sector over that stretch, up 7.55% through Tuesday’s close, followed by energy and industrials, up 4.9% and 4.1%, respectively. Financials , another sector boosted by a strong economy, rose 4% over the past month. Information technology , on the other hand, occupied the fifth spot, advancing 3.8%, helped in part by a strong performance in Tuesday’s session. Communication services was merely flat over the past month, making it the worst-performing sector in that time. The broader participation in the rally has been worth noting due to long-held concerns on Wall Street about the narrow market leadership of the Magnificent Seven dominance. It’s been encouraging to see stocks outside of the Big Tech complex recently accounting for more of the market’s gains against the backdrop of a stable U.S. economy, delayed Federal Reserve interest rate cut expectations, and projections for more evenly distributed earnings growth later in the year. This broadening market trend has been showing up in the Club’s portfolio. Financial holding Wells Fargo surged 19.4% over the past month, helped by clearing a key regulatory hurdle , while Linde — a member of the materials sector — was the third-best performing Club stock over the past month, advancing 12.9%. Over the same stretch, oil-and-gas producer Coterra Energy added 9.2%. Industrial name Eaton and chemical giant DuPont also have outperformed the market over the past month. Tech and Communication Services were being held back, in part, due to weakness in Club holdings including Apple and Alphabet , respectively. The two stocks have been among the members of the Magnificent Seven to fall on tough times lately. Electric vehicle maker Tesla — part of the Consumer Discretionary sector, has fallen on the toughest. Understanding the S & P 500 sectors The 11 sectors of the S & P 500 represent the various industries powering the U.S. economy. Some of the designations can be confusing because companies referred to as tech stocks in conversation and financial media span several sectors. For instance, the information technology sector houses companies including Apple, Microsoft and Nvidia — whereas Alphabet and Meta Platforms can be found in communication services. Those five stocks and Amazon , in the consumer discretionary sector, make up what the Club calls our Super Six, which comprises all the of the Magnificent Seven except for Tesla. Club names focusing on industrial end markets such as DuPont and Linde are considered chemical stocks and belong to the materials sector. To be sure, information technology and communication services have remained the top-performing sectors by a healthy margin in 2024 — up 13% and nearly 12% — as they extend their strong 2023 performances. Nvidia — an artificial intelligence darling and the leader of the Mag Seven — has been the No. 1 portfolio stock both year to date and over the past month — up 85.6% and 27.4%, respectively — helping to drive overall S & P 500 performance. The broader market strength has been reflected in the recent performance of the equal-weighted S & P 500 index over the past month compared with the traditional S & P 500, which weights companies by their market values and therefore gives multitrillion-dollar giants such as Microsoft, Apple and Nvidia outsized influence over the index. The equal-weighted S & P 500 — in which each stock holds the same sway — has advanced 5.4% over the past month, versus a 4.5% gain for the traditional market-cap-weighted index. The outperformance implies more stocks outside the mega-cap complex have been taking part in the rally, in contrast to the narrow market observed for much of 2023 and the early parts of 2024. For example, last year, the market-cap-weighted S & P 500 gained 24.2% while the equal-weighted index advanced only 11.6% in 2023. .SPXEW .SPX 1M mountain The equal-weighted S & P 500 over the past month compared with the S & P 500. Helped by the recent shift, the equal-weighted index last week notched a new all-time high for the first time in more than two years. On the other hand, the market-cap-weighted S & P 500 took out its old 2022 high in mid-January and has reached numerous fresh peaks since then, most recently Tuesday. The small-cap Russell 2000 also has outperformed the S & P 500 over the past month, an additional sign investors are looking to a wider group of stocks. An improved picture for the U.S. economy has been a key driver of the market shifts, and that’s showing up in Fed rate cut expectations. Coming into the year, investors were anticipating six Fed cuts in 2024, starting either in March or May. Now, the first cut isn’t expected until June, according to the CME FedWatch tool. Between three to four cuts for the year are being priced into the market, according to Wolfe Research. The Fed has kept interest rates steady between 5.25% to 5.5%, their highest level in more than two decades, since its July 2023 meeting . The February consumer price index report — released Tuesday by the Labor Department — did not alter Wall Street’s expectations around Fed rate cuts this year, despite coming in slightly hotter than expected. However, the Fed does meet next week, providing the market an updated view of how many interest rate cuts, if any, the central bank projects for this year. The number of projected rate cuts in 2024 has fallen as fresh data bolsters the view that the U.S. economy is doing well — forcing the market to confront the idea we could be in a “higher for longer” situation. For example, the economy added 275,000 jobs in February, more than the 200,000 expected, according to the nonfarm payrolls report released Friday , signaling a resilient labor market. The higher-than-expected unemployment rate and lower-than-expected wage inflation numbers in that same report point to a moderately slowing economy, which is helpful in the fight against inflation, but certainly not one on the brink of recession. Indeed, consensus estimates for real U.S. gross domestic product (GDP) this year continue to trend upward and now stand at a 2.1% annual growth rate, strategists at RBC Capital Markets said in a recent note to clients. Entering the new year, consensus was in the mid-1% range. The “broad-based improvement” in GDP expectations is “supportive of continued rotation in stock market leadership,” RBC argued. One reason why the Magnificent Seven had been driving market gains, beyond AI optimism, has been the cohort’s earnings growth to support stock price appreciation. In fact, the operating earnings growth of S & P 500 companies would have been negative in 2023 without the Magnificent Seven’s contributions, strategists at Canaccord Genuity said in a note to clients this week, citing data analysis from LSEG. “The good news is that consensus expectations call for a more balanced contribution beginning in [the second half of 2024], which supports our case for the broader market outperforming the mega-cap stocks as we move through the end of this year and beyond,” Canaccord wrote. Encouragingly, overall earnings estimates for the S & P 500 also have gone up recently. Bank of America on Tuesday raised its forecast to $250 per share from $235, implying 12% year-over-year growth. Bottom line Investors have recently been putting money to work in other areas outside the Magnificent Seven, which is understandable considering a resilient U.S. economy should, in general, support the business outlook for companies in more cyclical areas. We continue to own plenty of stocks outside tech, such as Linde in the materials sector and electrical equipment provider Eaton in the industrials sector, even as we continue to own the Magnificent Seven minus Tesla. Linde and Eaton are among our 12 core holdings . The heart of the matter is diversification. It’s challenging to predict with certainty when a market rotation may occur, but owning stocks across a range of industries and sectors — without putting too much into the Mag Seven — can help your portfolio participate in a broadening rally like we’ve been seeing over the past month or so. (Jim Cramer’s Charitable Trust is long AAPL, NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Visitors around the Charging Bull statue near the New York Stock Exchange on June 29, 2023.
Victor J. Blue | Bloomberg | Getty Images
A resilient U.S. economy is giving investors increased confidence to move beyond the “Magnificent Seven” tech stocks and into corners of the market that had lagged. This broadening trend has helped lift non-tech stocks and represents a positive development for the market over the long run.
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