To The Moon

With the surge in money supply, some stocks that were once ignored by the market might finally catch a break. Despite a few bumps along the way, the bull market for the $S&P 500(.SPX)$ hasn’t lost momentum. So far in 2024, this index representing large-cap U.S. stocks has soared over 20%.

But the value of the S&P 500 is getting super concentrated in just a few stocks. More than 20% of the index’s value comes from just three companies— $Apple(AAPL)$ $Microsoft(MSFT)$ $NVIDIA Corp(NVDA)$! The top ten stocks make up about 35% of the index, hitting the highest concentration level since the 1960s.

These big players are growing faster than most others, but this concentration can’t last forever. At some point, those heavyweights will give way to small-cap stocks. A key market indicator suggests that a major shift might be just around the corner.

The U.S. Money Supply is on the Rise!

The money supply in the U.S. has a huge impact on business and investor behavior. After a few years of sluggish growth and even declines, the money supply is now picking up speed, and it looks like this trend will continue.

Even more exciting, the growth is really taking off! In April, the M2 money supply was up about 0.6% year-over-year. By June, that jumped to 1.3%, and the latest data from August shows a whopping 2% increase! While M2 is still below its peak in 2022, market liquidity is clearly improving.

Looking ahead, we can expect this money supply growth to keep accelerating. The Federal Reserve just implemented its first rate cut since 2020, lowering rates by 0.5%. They might cut rates two more times by the end of this year, and we could see another drop of over 1% next year. This will lower borrowing costs and increase the total capital available to smaller companies.

One potential outcome? Small-cap stocks might just lead the next wave of this bull market!

What’s the Best Investment Strategy?

If you think market concentration will reverse—meaning a shift to “small-cap strength, large-cap weakness”—the simplest strategy is to buy equal-weight index funds. $Invesco S&P 500 Equal Weight ETF(RSP)$ is one of the best equal-weight ETFs out there, with an annual fee of just 0.2%.

In these equal-weight funds, each stock in the index gets the same investment amount. So whether it’s the big guys like Apple, Microsoft, and NVIDIA or those sitting at the 498th, 499th, and 500th spots in the S&P 500, each stock gets treated equally. This way, if the big companies stumble, they won’t drag the index down as severely as the traditional market-cap weighted S&P 500 would.

Of course, if the big companies keep performing well, the equal-weight index might lag behind, and that’s been the case for a while. But historically, after market concentration peaks, equal-weight indexes tend to have a strong and lasting upswing—and we’re approaching that peak now!

Another option is to invest in small-cap stocks. Many of these smaller companies rely on floating-rate debt rather than long-term fixed-rate bonds, making them more sensitive to interest rates. For your investment pick, consider $SPDR Portfolio S&P 600 Small Cap ETF(SPSM)$, which has a low fee of just 0.03%. Like the S&P 500, the S&P 600 includes profitability standards, so it leans toward value stocks, helping to mitigate risks when investing in small caps.

While small caps hold enormous potential for the future, their valuations vary significantly. The forward P/E ratio for the S&P 600 is just 15.3, while it’s 21.2 for the S&P 500. This suggests the market hasn’t fully realized that, with the ramp-up in money supply, small-cap stocks are primed for faster profit growth.