Is the bull market broadening or rotating? Yardeni Research answers By Investing.com

Investors are debating whether the recent outperformance of the S&P 400 MidCaps and S&P 600 SmallCaps – collectively known as the “SMidCaps” – along with the equal-weighted , points to a sustainable broadening of the bull market beyond the largest-cap stocks.

Alternatively, some believe this could merely be a temporary rotation out of the Magnificent 7 stocks into the rest of the S&P 500 and SMidCaps.

Weighing in on this matter, analysts at Yardeni Research shared five key insights.

1) ‘Forward Earnings:’ Analysts note that the aggregate forward earnings for S&P 500 LargeCap companies have reached new record highs this year, signaling strong performance. In contrast, forward earnings for the SMidCaps have not surpassed their 2022 peaks.

2) ‘Forward Revenues:’ The forward revenues of the SMidCaps have stagnated around their record highs over the past few years, coinciding with a period of disinflation, analysts observe. Meanwhile, the forward revenues of the S&P 500 have continued to climb to new highs, suggesting that larger companies are still leading the top-line growth.

3) ‘Forward Profit Margins:’ Smaller companies have struggled to improve their profit margins in recent years. While anticipated interest rate cuts might boost these margins, analysts are skeptical that “a few 25bps cuts to the federal funds rate will improve SMidCaps’ bottom lines significantly.”

“The problem might be that the most successful SMidCap companies get acquired quickly these days before they can significantly boost the earnings/revenues/margins of SMidCap stock price indexes,” the research firm’s analysts added.

4) ‘Economic Growth:’ As economic growth extends to the manufacturing and construction sectors, stock market breadth should improve, explained analysts. The Atlanta Fed’s GDPNow model recently revised its estimate for Q2 real GDP growth to 2.7%, up from 2.5%.

“That was after today’s data releases showing that housing starts have remained weak, but manufacturing production rebounded last month,” the note states.

5) ‘Today’s Action:’ Lastly, analysts highlighted geopolitical developments as one of the biggest risks to the current bull market.

A recent tech selloff was largely influenced by the Biden administration’s warning about potential restrictions on semiconductor chip sales to China, and former President Donald Trump’s comments that Taiwan should pay the US for protection considering the success of its semiconductor industry.

These developments led to a sell-off in chip stocks, sending the iShares Semiconductor ETF tumbling more than 7% on Thursday.