Morgan Stanley NYSE:MS, whose equity strategists track U.S. markets, expects the stock-market rally to broaden beyond the largest technology companies as earnings growth strengthens across the wider market. Strategists led by Michael Wilson highlighted that the median company in the S&P 1500 Composite Index is delivering earnings-per-share growth of more than 10%, representing the strongest performance since the post-Covid recovery. Wilson noted that analysts are continuing to raise profit forecasts for the consumer discretionary and transportation sectors, both of which are closely connected to economic growth. This earnings resilience among the median stock could help extend the rally beyond the technology giants that have dominated market gains in recent years.
The second-quarter earnings season begins Tuesday with results from the major banks, while analysts expect S&P 500 (SPY) companies to report a 23% increase in profits, according to Bloomberg Intelligence data. That level of growth would rank among the strongest readings recorded outside recoveries from major recessions, potentially setting a demanding earnings test for equity benchmarks trading near their all-time highs. Investors are expected to focus closely on technology companies for further evidence of artificial intelligence demand and whether future growth may support elevated valuations across the semiconductor sector. They will also be watching the large technology companies investing heavily in AI infrastructure, as concerns about the returns from substantial capital spending have prevented much of this hyperscaler group from fully participating in this year's S&P 500 rally.
The broadening trend is already appearing in market performance, with the equal-weighted S&P 500 outperforming the market-capitalization-weighted index for the first time since 2022. The equal-weighted benchmark reduces the influence of the largest technology companies, suggesting that gains are becoming more widely distributed across the market. RBC Capital Markets, whose strategists analyze equity sectors, has also become more positive on technology, with Lori Calvasina raising the sector to overweight following stronger revenue and earnings estimate upgrades and a return of fund inflows. Calvasina acknowledged that technology valuations remain expensive, but noted that the sector's median absolute and relative price-to-earnings ratios are only slightly above their long-term averages.