'Healthier' 2024 Stock Market Rally as Small Caps Soar and Breadth Broadens

According to BofA Global Research, the breadth of the U.S. stock market is improving, which is a positive indicator for the momentum of this year’s rally.

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Recently, small-cap equities have seen significant gains, with the S&P 500 and Dow Jones Industrial Average reaching new all-time closing highs on Tuesday. The Russell 2000 index, which focuses on small-cap stocks, ended Tuesday at its highest level since January 2022, marking five consecutive days of gains, according to Dow Jones Market Data.

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“The summer 2024 rally is getting healthier,” said Stephen Suttmeier, technical research strategist at BofA, in a research note dated July 16.

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As of Wednesday morning, the S&P 500, a key index for U.S. large-cap stocks, has risen more than 17% this year and has increased by 2.6% so far in July, based on FactSet data.

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This index has substantial exposure to Big Tech stocks, with significant contributions from Nvidia Corp., Facebook parent Meta Platforms Inc., and Google parent Alphabet Inc. These companies have helped drive the S&P 500’s rise in 2024, according to FactSet data.

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Additionally, the S&P 500’s advance-decline line, a measure of market breadth that tracks the number of advancing versus declining stocks, hit a new high, confirming the strength of the summer rally, Suttmeier noted.

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Despite this positive trend, the U.S. stock market was trading mostly lower on Wednesday. The S&P 500 was down 1.2% to around 5,600, according to FactSet data. The Nasdaq Composite, which reached a record closing high on July 10, was falling 2.4% on Wednesday morning, while the Dow Jones Industrial Average was up 0.2%.

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In terms of small-cap stocks, the Russell 2000 index paused its winning streak, dropping 0.5% on Wednesday morning. However, the Russell 2000 had surged 11.5% over the five trading days leading up to Tuesday, marking an impressive run for U.S. small-cap equities. This rally brought the index’s year-to-date gain to 11.1%, based on Wednesday morning trading, according to FactSet data.

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This improvement in market breadth, particularly the gains in small-cap stocks, indicates a healthier and more sustainable rally. The S&P 500’s performance has been buoyed by the strong performance of major tech companies, but the broader participation of smaller companies in the rally is a positive sign for the market overall.

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As the market continues to evolve, investors will be watching to see if this trend can be sustained. The broader participation across various sectors and stock categories could help support further gains and reduce the risk of a concentrated downturn if specific sectors like technology face challenges.

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Suttmeier’s analysis suggests that the recent rally is not just a result of gains in a few large-cap stocks but reflects broader market strength. This broader market participation can create a more stable and enduring rally, as it indicates that a wider range of companies is performing well, not just the tech giants.

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The advance-decline line’s new high is a technical confirmation of this improved market breadth. This measure, which accounts for the number of advancing and declining stocks, shows that more stocks are participating in the upward movement, rather than a small number of large companies driving the gains.

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While the market did experience a pullback on Wednesday, the overall trend remains positive. The gains in small-cap stocks, in particular, highlight the strength and resilience of the broader market. Investors will be looking to see if this trend continues and if the market can sustain its upward momentum through the rest of the summer and into the fall.

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In summary, the improvement in market breadth, as evidenced by the rise in small-cap equities and the new highs in major indices, suggests a healthier rally. The participation of a wider range of stocks in the market’s gains could provide a more stable foundation for continued growth. As always, investors should remain vigilant and stay informed about market trends and economic indicators to make well-informed investment decisions.

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