Investor focus turns to key consumer and wholesale inflation data due next week, as the pace of earnings reports slows.
The broadening rally faces a test next week, when fresh inflation data arrives.
A deeper look into the stock market's rally to record highs shows that the market of stocks is doing a lot better than it looks on the surface. And there's good reason to believe that will not only continue, but the outperformance should also increase.
There was a concern earlier this year that the market's rally was too narrow, as it was being driven by the shares of a small number of mega-capitalization technology companies at the center of the artificial-intelligence buildout. But that has changed. Basically, the more stocks that are participating in the rally, the merrier.
The S&P 500 index SPX, which weights its components based on their market capitalization - the bigger the company, the more influence its stock has - closed Friday at a record high, and just had its best week since April. It has rallied 13.3% in 2026.
Meanwhile, the Invesco S&P 500 Equal Weight ETF RSP, which weighs each component the same - Trade Desk (TTD) with a $6.5 billion market cap has the same influence of $5.4 trillion Nvidia (NVDA) - has climbed 15%, according to Dow Jones Market Data.
That puts the equal-weight ETF on pace to outperform the S&P 500 for the first time since 2022, as the chart below shows.
And within the S&P 500 SPX, shares of 226 constituents, or 45%, were outperforming the index this year. That was also the highest reading since 2022, following three calendar years in which roughly one-third or fewer finished beating the index.
The broadening of the rally means index-fund returns no longer hinge on a few AI names. It may also suggest that the gains are being driven by something wider than the AI trade, including solid earnings and a still-growing economy.
The question is whether that shift can last.
Part of the story is that capital expenditures on AI are no longer lifting only AI stocks. "Some of the economic strength that we've seen is a function of all of this capex spend [capital expenditures] feeding into the economy," said Richard Flax, chief investment officer at digital wealth manager Moneyfarm.
That strength has helped propel the S&P 500 to new highs, and some believe there's more room to run.
The market-cap weighted S&P 500 trades at just above 20-times forward earnings, according to FactSet data. But the equal-weighted S&P 500 recently traded at roughly 17 times forward earnings, in line with its 20-year median, according to Jonathan Curtis, a portfolio manager at Franklin Templeton.
That suggests investors have not yet priced in AI-driven productivity gains for the typical company, Curtis noted.
"If you look at the equal-weight index, the market is saying, 'I'm not seeing any productivity gains from this.' I think that's misguided," Curtis said. "AI is very likely to make the U.S. economy more productive. If investors believe that, they should be buying the equal-weighted S&P 500 and companies embracing AI in their operations."
Still, the broadening faces an immediate test. After a weak jobs report on Friday, inflation data and more earnings from tech giants are coming this week.
Inflation is the key for investors
After the release of government jobs data last week, investor focus turns squarely to inflation data due out this week.
While the economy lost jobs in July, inflation remains a problem, as it has remained above the Fed's target of 2% for years. So while the odds of a rate hike after the Fed's next meeting on Sept. 16 fell after the jobs data, that could change depending on next weeks data.
Brent Wilsey, chief investment officer at Wilsey Asset Management, said Friday's negative payroll number "likely doesn't change much for the Federal Reserve," but it does "raise the importance" of next week's data. He said the consumer-price index for July, due out Wednesday morning, could see an uptick since oil prices spiked during the second half of the month.
CPI is expected to have risen 0.3% on the month, after a flat reading in May, for a year-over-year increase of 3.4%. The producer-price index, or PPI, is due out Thursday morning and is seen rising 0.2% for the month, after a negative 0.3% print the month before.
Earnings head for the home stretch
With 88% of the S&P 500 having already reported results for the latest quarter, the pace of reports slows way down. But there are still some high-profile companies on the calendar in the coming week.
Optical networker Lumentum $(LITE)$ is slated to report earnings after Tuesday's close. While the company is nowhere near the size of the mega-cap tech companies, investors are likely to have a keen interest in the results, given that the stock has been the S&P 500's eighth-best performer this year with a gain of 141.5%. Earnings per share are projected to more than triple from a year ago to $2.97 and revenue is seen doubling to $987.7 billion, according to FactSet.
Also on the docket is Cisco Systems $(CSCO)$, which is due to report results after Wednesday's close. Earnings are expected to rise to $1.17 a share from 99 cents a share, according to FactSet, while analysts model revenue growth of 14.6% to $16.82 billion.
-Frances Yue
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