Some analysts have expressed concerns that the stock market rally is disproportionately driven by the technology sector, and while that’s true, investors can take comfort in the market’s increasing breadth.

More about the market’s breadth in a minute. First, let’s look at the latest conditions underpinning the rally and why it’s not simply a function of FOMO (fear of missing out).

Examining the fourth quarter of 2023, with 97% of S&P 500 companies delivering actual results, 73% of these companies have surprised with positive earnings per share (EPS) outcomes, while 64% have surpassed expectations with positive revenue results. These figures come courtesy of research firm FactSet.

For the Q4 earnings season, the S&P 500 has experienced a blended year-over-year earnings growth rate of 4.0%. “Blended” combines actual results with those that are projected. Should this figure hold, it would signify the index’s second consecutive quarter of earnings expansion.

Strong earnings performance has been a major pillar of the stock market rally. The major indices have been hitting record highs and they posted gains for the month of February.

In February, the tech-heavy NASDAQ led the pack with a 6.12% gain. The S&P 500 climbed 5.17%, while the Dow Jones Industrial Average added 2.22%. All S&P 500 subsectors finished the month in positive territory. The small-cap Russell 2000 gained 5.3%, presaging what’s expected to be a strong run for the small fry this year.

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Valuations have gotten a bit high but they’re not seriously out of whack with growth prospects. The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 stands at 20.4. This valuation exceeds both the five-year average of 19.0 and the 10-year average of 17.7, but economic and earnings growth are supportive of further equity gains.

The market’s new leadership…

Improving market breadth has been reflected in the rising New York Stock Exchange Advance/Decline line (NYAD). A rising NYAD indicates there is broad-based strength in the market, because a larger number of stocks are participating in the upward movement. The trend signals a healthy market where a significant portion of stocks is experiencing positive momentum.

The NYAD has ascended, as other sectors play catch up with the Silicon Valley mega-caps (see chart).

Inflation is falling, the economy is expanding, earnings growth is accelerating, and the Federal Reserve is on track to cut interest rates later this year. It all adds up to a winning formula for sectors and asset classes that underperformed in 2023. Specifically, we’re seeing cyclical sectors and small caps pick up the pace.

Cyclical sectors are those whose performance is closely tied to the broader economic cycle. They tend to thrive during periods of economic expansion and struggle during downturns. Examples include industries like manufacturing, construction, transportation, and consumer discretionary.

With the global economy on the path to recovery post-pandemic, demand for goods and services is picking up. Cyclical sectors are poised to benefit from increased spending and investment.

Developed and developing governments are prioritizing infrastructure development as a means to stimulate economic growth and create jobs. This surge in infrastructure spending bodes well for cyclical sectors such as construction, engineering, and materials, which are integral to building and maintaining these projects. That sound you hear are bulldozers, revving their engines in regions around the world.

In the meantime, March came in like a lion. The main U.S. stock market indices rose Friday and closed higher as follows:

• DJIA: +0.23%
• S&P 500: +0.80%
• NASDAQ: +1.14%
• Russell 2000: +1.05%

The S&P 500 and NASDAQ hit new record highs. The 10-year U.S. Treasury yield fell 1.69% to close at 4.18%.

Crypto catches fire…

You need to rebalance your portfolio and increase exposure to sectors that are poised to become the leaders of 2024. One such sector is cryptocurrency.

After gaining 156% in 2023, Bitcoin (BTC) has been on a tear so far this year, hitting a two-year high. Investors have been piling into the crypto market, making it red hot.

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The gap between traditional and digital markets is narrowing, as Bitcoin exchange-traded funds (ETFs) report massive inflows of new capital. The cryptocurrency market has embarked on perhaps the most powerful bull market in its history.

It’s clear that every portfolio should contain crypto assets. However, you need to be informed, to make the right choices. Direct investments in crypto coins or crypto-linked ETFs can be volatile.

In our coverage of the crypto market, we separate fact from myth, the wheat from the chaff. Start receiving our FREE e-letter, Crypto Investing Daily. Click here now!

John Persinos is the editorial director of Investing Daily.

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