Equities have increased sharply, with the S&P 500 more than 8 per cent higher in November, on the cusp of a new peak for 2023

Signs the U.S. stock market rally is broadening from the so-called Magnificent Seven of mega-cap growth and technology firms is strengthening investor hopes for a rally through year-end.

Equities have increased sharply, with the S&P 500 more than 8 per cent higher in November, on the cusp of a new peak for 2023, fuelled by dropping Treasury yields and cooling inflation figures that could signal the end of Fed rate hikes. Yields drop when Treasury prices increase, and the lower returns on guaranteed fixed-income investments make stocks more appealing.

In one encouraging sign, nearly 55 per cent of the S&P 500 were trading above their 200-day moving averages as of Monday. That level breached 50 per cent last week for the first time in around two months, as per LPL Financial.

Breadth is finally starting to widen out to levels more commensurate with bull markets, said Adam Turnquist, chief technical strategist at LPL Financial. This has been one of the keys to calling this recovery sustainable.

Among other signs, the equal-weight S&P 500 – a proxy for the average stock in the index – increased 3.24 per cent last week. That was substantially more than the 2.24 per cent increase for the market-cap weighted S&P 500, the biggest percentage point outperformance for the equal-weight index in around five months.

Even so, the S&P 500 equal-weight index has added only 3 per cent in 2023 against an 18 per cent increase for the overall S&P 500 – on pace for the biggest such annual percentage-point gap in 25 years.

Much of that underperformance is because of the outsized gain in the Magnificent Seven stocks, which collectively hold a 28 per cent weight in the S&P 500 index: Apple, Microsoft, Alphabet, Amazon, Nvdia, Meta Platforms and Tesla. Overall, the group of stocks makes up around 50 per cent of the weighting of the Nasdaq 100, which is around 47 per cent higher for the year to date.

Struggling small-cap and bank stocks have risen, especially after last week’s U.S. consumer price data for October was unchanged from the previous month.

The small-cap Russell 2000 is 5.5 per cent higher since the CPI (Consumer Price Index) data with the S&P 500 banks index up 6.5 per cent, compared to a 3 per cent increase for the S&P 500. Year-to-date, the Russell 2000 is 2 per cent higher, while the S&P 500 banks index has dropped more than 6 per cent.

Mona Mahajan, senior investment strategist at Edward Jones, said an environment that could be conducive for a widening of the rally “is starting to take shape.”

This environment where rates are cooling, inflation is moderating and the Federal Reserve is on the sidelines, that is typically a good backdrop for risk assets, she said.

Typically when rates begin to drop, you get valuation expansion and the areas that we could see some more meaningful valuation expansion is outside of large-cap tech, Mahajan added.