A cut in the Federal Reserve's interest rates may broaden the bull market beyond just major tech companies.

While the S&P 500 index has reached new record levels in recent weeks, the number of individual stocks in the index has lagged significantly. This has raised concerns about the market's increasing reliance on a small group of companies with massive market capitalizations.$BTC

Data from Oppenheimer & Co. shows that at the latest breakout, only 88 companies on the New York Stock Exchange recorded new highs compared to those that reached new lows, according to Bloomberg. According to data since 1972, whenever this happens, the S&P 500 index usually underperforms in the following twelve months compared to times when more stocks are rising.$XRP

Most of the recent developments have resulted from a handful of major tech companies. The "Magnificent Seven" index has risen by 36% from its lows in April, compared to a 25% increase for the S&P 500 index as a whole.

According to strategists at Bloomberg Intelligence, only 10% of the S&P 500 stocks are currently driving the index higher. This is much lower than the usual 22% of stocks that typically drive gains between 2010 and 2024.$SOL

Ari Wald, chief analyst at Oppenheimer who led the study, said, "Broader participation is crucial. Rallies that see participation from most stocks, both large and small, are the rallies that usually last."

This lack of broad support is also evident in the equal-weight version of the S&P 500 index, which treats all companies equally. The index has not reached a new high since November 29 of last year, confirming that many stocks remain on the trading sidelines.

Jim Paulsen, an independent market strategist, said, "I thought that coming off its lows, with this sharp rally, we would see a broader move during that period." His view reflects a broader discussion about whether the recent market strength can extend beyond a handful of the largest names.

A cut in the Federal Reserve's interest rates may broaden the bull market beyond just major tech companies.

Traders received mixed messages with the stock market's recovery over the past two months. On one hand, the U.S. economy remains in good shape, and inflation is still under control, even as concerns about trade policies persist. Investors have benefited from gains made by major tech stocks as well as from more speculative market sectors.

Nonetheless, concerns about tariffs remain. On Monday, July 7, the White House announced new tariffs on imports from Japan, South Africa, and South Korea, set to take effect in August. The S&P 500 index fell by 0.8% in response to this news, although it remains less than 1% off its all-time high.

This bull market has lasted for 32 months, but only a few companies are driving most of the gains. This raises concerns that the entire market heavily relies on just a handful of major companies. Paulsen believes that a shift by the Federal Reserve toward lowering interest rates in the coming months may contribute to broadening participation.

He said, "Many strong positive forces for stocks are supported by the Fed's unusually hawkish policy, and I think they are nearing a change to that."

There are some signs of improvement among small companies. Recently, the Russell 2000 index surpassed its 200-day average, a development described by Wald as a potential positive point.

"However, if small-cap companies start to fail and erase their recent gains, this would indicate that the rally may be fading and set the stage for seasonal volatility later in the third quarter," he warned.

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