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The S&P 500 (SP500) should see market breadth broadening through the end of the year and the beginning of next year, a Wells Fargo Market Commentary note said.
Only four stocks — Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), and Alphabet (GOOG) — are responsible for over 52% of the S&P 500 (SP500) return through the first half of the year, according to data from FactSet.
In addition, only two out of the 11 market sectors — those are information technology (XLK) and communications services (XLC) — have outperformed the S&P 500 this year.
But market breadth is likely to broaden with more stocks expected to go up between now and the end of the year, said Wells Fargo Strategist Scott Wren in the note.
He said that broader participation “by an increasing number of stocks in a rising market is a positive indicator” and profitability is an important factor.
Earnings fundamentals are supporting the AI-related stock performances. During the first quarter, earnings within communication services (XLC) grew 44% year-over-year, and within technology earnings grew 25% year-over-year. Earnings for the S&P 500 (SP500) as a whole grew 8% during the first quarter.
In addition, consensus estimates for the quarters ahead show an increase in S&P 500 (SP500) earnings growth without the Magnificent 7 stocks, and a slowdown in the growth for the largest companies. This broadening growth is estimated to start in the fourth quarter of 2024 and to gain strength through the middle of next year, said Wren.
Overall S&P 500 (SP500) earnings growth should remain relatively strong in the intermediate term with global and U.S. economies picking up and performing better in the second half of next year, he added.
Wells Fargo 2025 year-end target for the S&P 500 (SP500) is 5,700.
“For now, we suggest trimming gains in outperforming sectors, and look for opportunities in the energy (XLE), industrials (XLI), materials (XLB), and health care (XLV) sectors.”