A broader rally takes shape: time for equal weight?
The Magnificent 7 mega-cap tech stocks, which drove the index’s gains over the past two years, have started to lose momentum, allowing a broader range of stocks to rally.
Several factors contribute to this shift. The Federal Reserve has signaled a strong inclination toward cutting interest rates. Fed Chair Powell emphasized the focus on inflation and suggested the bigger risk now is keeping rates too high for too long. Markets have interpreted this as a near-certain indication of rate cuts by the end of the year.
The anticipation of rate cuts has boosted small-cap stocks, leading to a notable divergence in market performance. This trend may continue, especially if US small-cap earnings start to outpace those of large caps. Projections suggest that while large caps led earnings growth in the first half of 2024, small caps are expected to take the lead in the latter half.
On the political front, there remains a strong likelihood of a Republican victory in the 2024 US election, which could lead to business-friendly policies such as deregulation and extended tax cuts. This potential shift in policy could further, acting as a further boost to small caps.
With the market potentially turning, investors may want to consider equal-weighting exposure. This may be particularly important for tech exposure, an area of the market that has been dominated by a handful of mega-cap names. An equal-weighted approach allows investors to gain a broader exposure, not dominated by the handful of names that have, until now, driven the market.