July 6, 2025
The S&P 500 has broken out to new all-time highs in July, and we are finally seeing a change in the behavior of the average stock. For most of 2024 a primary concern for the bull was the lack of upside participation at the stock level despite a top line uptrend for US equities. After the S&P 500 made its bullish pivot on April 7th we’ve seen a change in investor preference and leadership themes. The month of April saw reflation that was similar to the previous bull trend with Mag 7 stocks and AI plays leading the market higher. However, since the beginning of May market breadth has expanded, and higher beta stocks have begun to outperform Mega-cap. Growth stocks, the Russell 2000 has begun to outperform the SP500 and pure cyclical stocks with the highest beta profiles are now leadership over longer-term momentum plays (chart below).
The table below shows top 20 constituents in the S&P 500 sorted by 3yr beta vs. the index. We can see this list is different in character as we’re getting streaming services, discretionary plays, Semiconductors that are aligned more with hardware, smart grid and infrastructure plays have participated in the near-term along with the more advanced AI chips from NVDA and AVGO.
Mag7 stocks have benefitted from the equity pivot, but, looking at the chart below, we can see the cohort outperformed during the first leg of the recovery, but have been market performers as a group dor the past 6 weeks. AAPL, GOOG/L and TSLA have been challenged while META, MSFT, NVDA and AMZN have acted well in the near-term.
We’ve also seen confirmation of the move to pro-cyclical themes based on what’s not working. Despite softening economic data with both the ISM manufacturing and services series flirting with contractionary levels below 50, min vol. sectors continue to lag (chart below). While we do think this will setup the traditional summer pullback if the spread gets too wide, the “risk-on” message is clear.
Our strongest evidence that macro conditions are supporting an expansion of the bull trend comes from our market breadth series. When we consider the internal charts of both the S and P 500 and the Russell 2000 index, we see the number of stocks moving above their respective 50- and 200-day moving averages are expanding (charts below). The S and P chart is confirming the recent bullish reversal with both the short and the longer-term breadth series moving above highs generated in February of 2025. The Russell 2000 series has been expanding recently and we’re looking for a similar move for its breadth series above February highs. It’s been a lower bar to jump over for small cap stocks as interest in this cycle has been sparse. However, if we see bullish expansion from the R2K confirming the bull trend in large cap stocks that builds conviction to add to higher beta exposures on weakness.
Since equities put in their low in early April 2025, we’ve seen the recovery methodically check all of our boxes for a sustained bullish reversal increased interest in high beta stocks is another characteristic that we would expect for a strong full trend that can sustain past the near term. Masters should still be prepared for seasonal weakness over the summer but the setups that we are observing at present are indicative of further expansion. Lower interest rates will enable the Federal Reserve to influence markets through dovish policy transmission while US leadership in Technology and other growth areas are likely to sustain as long as inflation continues to stay contained.
Our elevate model starts July aligned with growth and pro cyclical sectors as we try to ride the wave of expanding risk appetite in the near term.
Patrick Torbert, Editor & Chief Strategist, ETFSector.com
Data sourced from FactSet Research Systems Inc.
