There’s been much recent discussion about the Magnificent 7 stocks and their purported role in propping up the current market rally. These seven companies – Apple, Amazon, Meta Platforms, Alphabet, Microsoft, Nvidia, and Tesla – constitute nearly 30% of the S&P 500’s total market capitalization.
Lately, the narrative has been that these seven stocks are single-handedly supporting an otherwise lackluster market. As a group, they have largely outperformed expectations during this fourth-quarter earnings season. Apart from Tesla, the other five members of the Mag 7 have delivered impressive growth figures. Chip giant Nvidia is scheduled to report its Q4 results later this month.
Total fourth-quarter earnings for this group are anticipated to rise by 48.7% on 14.5% higher revenues compared to the previous year. These staggering growth rates for companies of this scale are not surprising. It’s no wonder the individual stocks continue to outshine the market. Looking ahead to the full year of 2024, earnings for this group are expected to climb 19.7% on 8.5% higher revenues.
Image Source: Zacks Investment Research
However, is it truly just these seven stocks propping up the market? The answer to this question lies in identifying current market conditions. Let’s peel back the curtain and see what we discover.
Market Breadth Improves From October Lows
We can observe that market breadth, measured by the percentage of stocks trading above their 200-day moving average on the NYSE, has significantly improved compared to the lows of the bear market. The figure has surged from the low teens to a multi-year high of approximately 75% as market breadth exhibited signs of life.
Image Source: StockCharts
This is the kind of development we want to witness from a longer-term perspective. A greater number of stocks joining the rally translates to broader participation and increases the likelihood of a sustainable bull market. The major U.S. indexes are scaling new heights this year as a new bull market has emerged.
Conversely, once market breadth reaches an extreme, the likelihood of a reversal starts to increase. We are beginning to see this trend now as breadth has somewhat diminished compared to the start of the year. The probability of a short-term pullback in the near future appears to be high, particularly given the substantial run-up over the past several months. However, in the longer term, the heightened breadth bodes well.
Naturally, tech stocks have predominantly spearheaded the advances this year, driven by a bullish artificial intelligence theme. It is typically technology that leads in the initial stages of a bull market, as these stocks also face the brunt of volatility. But as bull markets broaden, other segments of the market once again become appealing.
Other Sectors Begin to Show Strength
Outside of tech, several sectors are trading at or near 52-week highs. Financials, industrials, and healthcare have re-emerged at the forefront:
Image Source: StockCharts
These market segments started to exhibit strength late last year, with each notching a minimum rally of 15% over the past few months. Therefore, when you hear that only big tech is partaking in this rally, take it with a grain of salt.
Indeed, tech has been responsible for much of the gains in the major indices. And yes, the Mag 7 group accounts for a relatively large percentage of S&P 500 earnings. However, numerous individual stocks within the healthcare, industrial, and financial sectors are attaining new 52-week highs.
Two that come to mind are pharmaceutical giant Novo Nordisk, whose expansive diabetes and obesity drug portfolio has propelled the stock to new all-time highs. Earnings projections for the current year have increased by 2.17% in the past 60 days. Full-year earnings for Novo Nordisk of $3.29/share would translate to a 21.9% improvement over the previous year:
Image Source: Zacks Investment Research
Within the industrial sector, construction and mining equipment manufacturer Caterpillar’s stock has also surged to all-time highs. Considered an indicator of the global economy, Caterpillar has witnessed its shares skyrocket by more than 36% over the past 3 months:
Image Source: StockCharts
Final Thoughts
The market is signaling positive outcomes moving forward, with companies from various sectors participating in this upward trend. While tech stocks led the advances in the initial stages of this new bull market, other segments have displayed renewed strength as they join the rally.
With many technology stocks extended beyond proper entry points, it’s a good time to diversify portfolio holdings and look elsewhere. Ensure you take advantage of all that Zacks has to offer as we venture further into the New Year.
