Expect a concentrated rally into year-end, Wolfe says

Investing.com -- Wolfe Research expects the stock market’s recent gains to remain concentrated among the largest companies as fundamentals and investor sentiment continue to favor mega-cap names.

Wolfe Research analyst Chris Senyek wrote that “by far the most common inbound question we’ve received from investors over the past few weeks has been whether we expect the market to broaden out into year-end.”

He added, “our sense remains the rally will continue to be concentrated as fundamentals for some of the largest companies in the market are much more attractive on a relative basis.”

According to Wolfe, the ongoing enthusiasm around artificial intelligence spending remains a key near-term driver.

“We believe the AI spending narrative is likely to continue to drive companies most leveraged to this theme higher in the near term,” Senyek said, noting that “last week’s 3Q results from key bellwethers have come in solid.”

Wolfe Research pointed out that “the market-weighted S&P 500 is currently outperforming its equal-weighted counterpart by approximately 8.3% year-to-date,” extending a trend that has persisted since 2023.

The analyst sees "no change to this trend as market concentration, fund flows, and retail participation are likely to keep bidding up the largest companies in the near term.”

For that trend to reverse, Wolfe believes “we would likely need to see a sustainable shift in earnings growth for SMID indices,” referring to small- and mid-cap stocks, “which have not seen significant growth relative to the S&P 500 since mid-2022.”

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