There are a number of lenses through which one can view the ongoing equity rally following another banner quarter for stocks.

One such lens shows you a bifurcated market defined, like society, by “haves” and “have-nots.” The haves are big corporates and specifically big “tech,” with the scare quotes to denote that I’m referring here to “tech” in the informal, colloquial sense that we typically employ to capture mega-caps that aren’t formally classified as Tech, capitalized. The have-nots are all the other companies, which on an extreme reading is the so-called “S&P 493”: Stocks other than the vaunted “Magnificent 7.”

That view’s an oversimplification. It misses key nuance including and especially the fact that Tesla and Apple have underperformed quite dramatically in 2024. There’s nothing “magnificent” about 30% and 8% declines, respectively, when the broad market’s up ~10%. Still, it’d be obtuse not to acknowledge that concentration — extreme concentration — is a defining characteristic of the US equity market. Indeed, you could make the case that with Tesla and Apple struggling, the situation’s even more acute: The rally depends on Nvidia, Microsoft, Meta, Alphabet and Amazon. So, five companies rather than seven.

Looking ahead, a glass half-full take on extreme market concentration says the rally has room to broaden. Considerable room. A glass half-empty take says that if the economy finally succumbs, that broadening’s less likely, leaving the weight of the world on the shoulders of just a few companies which’ve already re-rated substantially, rallied sharply or both.

The figure above’s simple: The equal-weighted S&P outperformed the cap-weighted index in March, an encouraging sign. Perhaps. The question’s whether it’ll last.

“Market moves since February have offered an initial hint that the performance gap between the S&P 500 equal weight vs. both the S&P 500 and Nasdaq has started to narrow,” Goldman’s Cecilia Mariotti said. “We believe a confirmation of the pick-up in activity might lead to a broadening out of the rally.”

Note the implication: For the rally to broaden sustainably, activity needs to pick up, where in this context that means manufacturing activity needs to rebound and catch up to the resilient services sector, and also that global activity needs to catch up to the US.

The problem (or one problem) is that cyclicals “haven’t seen upward revisions,” as Mariotti noted, referring to the figure on the right, below.

The figure on the left, above, suggests cyclicals have already priced in an activity rebound. Taken together, that’s not a great combination: Cyclical assets have preemptively priced a rebound, but earnings revisions are moving the wrong way.

“Optimism in equities has mostly been driven by the boost from AI, leading to exceptional market concentration,” Mariotti went on, in the course of suggesting that resilient earnings, “especially in the US,” are for now just another manifestation of mega-cap exceptionalism.

SocGen’s Albert Edwards debated the same points in his latest, discussed here on Thursday. The figure below, which wasn’t included in the linked article, shows the six-month moving average of analyst optimism (proxied using the share of EPS changes that are upgrades) with ISM.

“ISM manufacturing typically moves in step with analyst optimism,” Edwards said. With optimism wavering (or at least stalling), ISM’s “at risk of a surprise downturn.”

In her piece, Mariotti noted that the US equity rally’s already running well ahead of “schedule” (so to speak) compared to historical rebounds from cycle lows on ISM manufacturing, and suggested the fate of the rally may hinge on the trajectory of global activity from here.

Taken together, the above points to a market out ahead of a broader cyclical recovery that’s not reflected in earnings revisions.

As ever, a lot hangs on the viability of the AI story. “Profit margins [are] potentially undergoing a structural shift thanks to AI eventually boosting productivity in aggregate,” Mariotti ventured.

Edwards said that’s “entirely plausible” over the longer run, but for the time being, earnings momentum looks tenuous which bodes ill for the bull case. “Predicting that the overall ISM will rise strongly, the bulls point to cyclical leading indicators such as the excess of ISM new orders relative to inventories,” he wrote. “All I can say is that for analyst optimism on the S&P to have topped out only at 50% before subsiding is not the stuff of normal cyclical recoveries, let alone an AI ‘new era.'”