Why the stock market has risen even with no Fed rate cuts

The Google campus is pictured on May 2 in Mountain View, Calif. (Jason Henry/The New York Times)

The Federal Reserve has disappointed investors this year, but no matter. The markets have adjusted.

Even without any interest rate cuts so far in 2024 — and with the likelihood of just one meager rate reduction by the end of the year — the stock market has been purring along. That’s quite an achievement, given the expectation in January that the Fed would trim rates six or seven times in 2024 — and that interest rates throughout the economy would be much lower by now.


Buoyant as the stock market may seem, when you look closely, it’s apparent that the S&P 500’s recent returns rest on a precarious base.

AI fever — based on the belief that artificial intelligence is ushering in a new technological age — has been spreading among investors, and that has been enough so far to keep the overall stock market averages rising. But the rest of the market has been rather ho-hum. In fact, strip away the biggest companies, especially the tech companies, and overall market performance is unimpressive.

Concentrated returns

One stock in particular has led the market upward: Nvidia, which makes the chips and other associated infrastructure behind the talking, image-generating, software-writing AI apps that have captured the popular imagination. Over the last 12 months, Nvidia’s shares have soared more than 200%, vaulting its total market value above $3 trillion, which places it in elite territory shared only with Microsoft and Apple in the U.S. market.

Other giant companies with a convincing AI flavor, like Meta (the holding company for Facebook and Instagram) and Alphabet (which owns Google), along with chip and hardware companies like Super Micro Computer and Micron Technology, have turned in superlative performances lately, too.

But the narrowness of the stock market rally becomes clear when you compare the standard S&P 500 stock index with a version that contains the same stocks but is less top-heavy.

Consider that the standard S&P 500 is what is known as a capitalization-weighted index — meaning $3 trillion stocks like Microsoft, Apple and Nvidia have the greatest weight. So when these giants rise 10%, say, they pull up the entire index much more than a 10% gain by a smaller company in the index, like News Corp, with a market cap of around $16 billion, can.

The standard cap-weighted S&P 500 has risen almost 14% this year — a spectacular gain in less than six months. But there is an equal-weighted version of the S&P 500, too, in which 10% gains — for giants like Microsoft and merely large companies like News Corp — have the same effect. The equal-weighted S&P 500 has gained only about 4% this year. Similarly, the Dow Jones industrial average, which isn’t cap-weighted (it has plenty of its own idiosyncrasies, which I won’t get into here), is up less than 3%.

A premium on size

In short, bigger is better in the stock market these days. A recent study by Bespoke Investment Group, an independent financial market research firm, demonstrates this. Bespoke broke down the S&P 500 into 10 groups, based solely on market cap. It found that the group containing the biggest companies was the only one to have positive returns over the 12 months through June 7. At the same time, the group with the smallest stocks in the index had the biggest losses.

This pattern held true when Bespoke looked only at AI companies. Giants like Nvidia had the strongest returns. Smaller companies generally lagged behind.

During just this calendar year, stock indexes tracking the largest companies are trouncing those that follow small-cap stocks: The S&P 100, which contains the biggest stocks in the S&P 500, is up more than 17%. The Russell 2000, which tracks the small-cap universe, is up less than 1% for the year.

Implications for investors

While I pay close attention to these developments, I try not to care about them as an investor. In fact, I view the concentration of the current market as a vindication of my long-term strategy, which is to use low-cost, broadly diversified index funds to hold a piece of the entire stock and bond markets. The overall market’s dependence on a small cohort of big companies is fine with me, but that’s only because I’m well diversified. So I don’t worry much about which part of the market is strong and which isn’t.

On the other hand, if you’re an active investor who makes bets on individual asset classes, stocks or sectors, there’s a lot to think about right now. You may bet on the continuing momentum of the biggest stocks — or even of just one, Nvidia. Of course, you may believe it’s smarter to go the other way entirely. You may want to seek stocks that have been neglected in this narrow bull market — stocks with lower market capitalizations and what seems to be greater value, based on metrics like their price-to-earnings ratio.

Historically, small-cap value stocks have outperformed large-cap growth stocks over long periods, though they haven’t done so recently. Maybe it’s time for a turnaround? While you’re making changes in your investments, you may also conclude that bonds and bond funds are a waste of time, compared with the stock market and its more spectacular gains.

Make the right decisions on any or all of these issues and you could make a great deal of money. Some people undoubtedly will. But if you make a mistake now — or later, even after making some blazingly lucrative bets — you could easily end up losing most of your money.

So I’m playing the long-term percentages, based on plenty of academic research suggesting that most people, most of the time, are better off letting the overall markets make their money for them. Keep costs low with index funds; hold stocks and bonds all the time, in a reasonable proportion for your needs and risk tolerance; and try not to worry too much about all of these complex issues — not in your investing life, anyway.

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