BREAKINGVIEWS-The un-magnificent 493 can nudge the market higher

By Sebastian Pellejero

NEW YORK, Sept 23 (Reuters Breakingviews) - The S&P 500 Index's .SPX march to record highs seems improbable in retrospect. An all-out trade war is reshaping global commerce; consumer sentiment has soured; the labor market has weakened. Yet the benchmark has gained more than 14% so far this year, continuing an unbroken streak since 2023. The Dow Jones Industrial Average .DJI has similarly notched a new peak, while the Nasdaq Composite .IXIC trades close to its recent top. Unpredictable policy broadsides and deteriorating economic data will continue to take their toll. Yet there is another layer of strength that can support stocks.

Jobs numbers encapsulate the tension. In August, payrolls expanded an estimated 22,000, the weakest pace in years. The unemployment rate, while low, has risen nearly a full percentage point from last spring. Meanwhile, the Conference Board's measure of consumer confidence in the labor market has sunk to levels usually seen in recessions.

Yet small companies are moving towards expansion mode, at least judging by the National Federation of Independent Business' jobs survey. The Institute for Supply Management's survey of manufacturing orders has ticked up, while the Conference Board's survey of 122 chief executives jumped 15 points from last quarter. Taken together, Piper Sandler economists expect these improvements to translate into 3% real gross domestic product growth next year.

This is hardly the dominant theme of recent years, when the might of the so-called Magnificent Seven stocks — Alphabet GOOGL.O, Amazon.com AMZN.O, Apple AAPL.O, Meta Platforms META.O, Microsoft MSFT.O, Nvidia NVDA.O and Tesla TSLA.O — have accounted for a huge and growing chunk of the soaring stock market. Their heft, some 34% of the S&P 500, is still a fact of life. Yet their less magnificent peers are perking up, too.

Earnings-per-share growth for the index's constituents has turned positive after a long period of stagnation, according to Morgan Stanley. The share of companies where analysts are upping their expectations for the bottom line versus those where hopes are fading surged 35% on a three-month basis, the bank's analysts add. This sort of broad-based shift historically foreshadows market rallies.

True, the S&P 500's seven largest members look fully valued, trading well above historical norms. Remove them, though, and the rest of the index is near its long-term average multiple of 17 times next-twelve-months' earnings.

Plenty of risks remain: inflation could prove stickier than expected, further cuts to interest rates could be slow in coming, or geopolitical tensions could further flare. A big correction among technology giants riding a wave of artificial-intelligence-fueled optimism would affect everyone. For now, though, broader earnings improvements and some pockets of economic strength should provide a boost up the wall of worry.

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CONTEXT NEWS

The benchmark S&P 500 index reached 6,664 points on September 19 for a new high. The Dow Jones Industrial Average reached an all-time peak on September 22, while the tech-heavy Nasdaq Composite trades near its top from earlier in the month.