S&P 500 equal-weight index gains 10.4% as rally broadens beyond tech

The S&P 500 equal-weight index has climbed 10.4% year to date through Tuesday, outpacing the market-cap weighted version's 9.7% gain for the first time since ChatGPT's debut in 2022.

"Markets are clearly encouraged that the current Iran negotiations will have a good chance of success," Scott Chronert, equity strategist at Citigroup, wrote to clients. "The fact is that 'broadening' has already kicked in."

The rotation marks a shift from the artificial-intelligence trade that has dominated markets for more than three years. Wells Fargo strategists this week described the setup as an "everything rally," with cyclical stocks catching up after months of underperformance. The S&P 500 healthcare sector, down more than 1% year to date, is drawing renewed attention from strategists including UBS's Gerry Fowler, who cited "increased appeal" in the group as earnings revisions turn positive. Amgen has gained 6.3% this year, while Eli Lilly and Cardinal Health were also highlighted as potential beneficiaries. The 10-year Treasury yield has eased in recent weeks, providing further support for rate-sensitive sectors.

For investors, the broadening suggests healthier market internals and reduces the risk of a tech-led correction dragging the entire market lower. The equal-weight S&P 500 outperforming its cap-weighted counterpart historically points to a more sustainable advance, as gains are supported by a wider base of companies rather than a handful of mega-cap names. The shift also opens opportunities in areas that had been overlooked during the AI frenzy.

Banks and Retailers Lead Cyclical Rotation

Financial and consumer-discretionary stocks have been among the biggest beneficiaries of the rotation. Regional banks, in particular, have surged as easing geopolitical tensions and a softer oil price environment reduce headwinds for domestically oriented companies. The US dollar index has edged lower this quarter, providing additional tailwinds for multinational companies and commodity-linked sectors. The move has lifted small-cap and mid-cap names alongside their larger peers, with the Russell 2000 showing signs of catching up after lagging the S&P 500 for much of the past year.

Software Stocks Stage a Comeback

One of the more striking turnarounds is in software, a sector that had been left behind during the AI-driven rally. The iShares Expanded Tech-Software Sector ETF (IGV) is down 13% year to date but has surged more than 14% in the second quarter alone, as beaten-down growth names attract buyers. UBS's Fowler noted that software is seeing improved earnings revisions, which could provide further momentum. The sector's recovery is particularly notable given that it had been one of the hardest-hit areas during the rotation out of growth stocks.

What's at Stake for the Second Half

The broadening of the rally raises the stakes for the second half of the year. If cyclical and value stocks continue to gain ground, it could point to a durable expansion that extends well beyond the technology sector. However, the shift also introduces new risks: a resurgence in geopolitical tensions or a surprise hawkish turn from the Federal Reserve could disproportionately hit the very sectors now leading the advance. The next major test comes with the Fed's July meeting, where rate decisions will shape the trajectory for rate-sensitive industries.

This article is for informational purposes only and does not constitute investment advice.