To The Moon

As we enter the final month of 2023, the U.S. stock market rally has shifted into a healthier phase.

Fueled by optimism around a pivot in Fed policy, sectors like financials and smaller-cap stocks have surged, broadening the recent gains beyond the dominance of just seven large-cap tech stocks.

According to research by Mike Wilson, Chief Investment Officer at Morgan Stanley, 78% of the $S&P 500(.SPX)$ components traded above their 200-day moving averages last week, matching the year's highs.

On Monday, Wilson noted that the past month has seen the best broad-based rally in U.S. stocks in 2023, which the bearish strategist views as an "encouraging sign."

This is because one of the key reasons many were skeptical about the S&P 500's gains in 2023 was the lack of market breadth.

They pointed out that for most of the year, the index's gains were primarily driven by the "Magnificent Seven" - $Apple(AAPL)$ $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Microsoft(MSFT)$ $Meta Platforms, Inc.(META)$ $Amazon.com(AMZN)$ $Tesla Motors(TSLA)$ $NVIDIA Corp(NVDA)$.

In early October, Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, likened the rally in "Magnificent Seven" to generals leading an army. These stocks played a leading role, but for the rally to be truly powerful, it needed the "soldiers" - the other stocks in the S&P 500 - to join in.

Now, as the S&P 500 once again approaches all-time highs, these generals have "stepped back" but are not dragging their heels.

An analysis by Jared Blikre of Yahoo Finance shows that over the past month (since November 17th), the biggest gainers in the S&P 500 have been $Bath & Body Works Inc.(BBWI)$ $Illumina(ILMN)$ $Norwegian Cruise Line(NCLH)$, with share price increases of over 35%.

Meanwhile, none of the "Magnificent Seven" have gained more than 8% during the same period. Tesla's stock price led the pack with a gain of about 7.9%, but it barely squeezed into the top 50 gainers in the S&P 500.

Kevin Gordon, Senior Investment Strategist at Charles Schwab and a colleague of Sonders, stated that the market rally has become more healthy and broad-based. Gordon noted that the Russell 2000 index has gained nearly 15% over the past month.

There has been much debate about whether this year's rally in U.S. stocks is a sustainable bull market, and we can't claim it as such just yet. But now we're finally seeing smaller cap stocks start to move, which is a typical characteristic of a bull market.

Gordon pointed out that there was a broad-based rally in U.S. stocks at the end of summer, but it proved to be short-lived. This time could be different, and the key lies in whether the current trend of sector rotation can continue.

That is, the leadership rotating from technology, communication services, and consumer discretionary to sectors like financials, industrials, and real estate. Coincidentally, these three sectors have been the leaders in the S&P 500 over the past month.

If this trend continues and the "Magnificent Seven" don't take a dive, Gordon said, the market rally could enter a "nirvana" state and suggest a more optimistic economic outlook for next year.