A new bull market is underway, with a supportive macro environment and AI-driven efficiency gains expected to fuel a broad-based earnings recovery. This outlook has led strategists to upgrade U.S. small-cap stocks, now preferring them over the large-caps which have dominated recent growth.

The perception of a market rally driven solely by a few tech stocks is misleading. The S&P 500 excluding the top 10 companies has seen strong earnings growth and consistent ~15% annual returns for the past three years, indicating broad market health.

Historically, small-cap companies grew earnings faster than large-caps, earning a valuation premium. Since the pandemic, this has flipped. Large-caps have seen astronomical earnings growth while small-caps have lagged, creating a rare valuation discount and a potential mean reversion opportunity for investors.

The market's recent strength is not being driven by the mega-cap MAG7 stocks, which are underperforming. Instead, leadership has rotated to sectors like basic materials, healthcare, industrials, and financials. The breakout in the equal-weight S&P 500 confirms this widening breadth is occurring under the surface.

Beyond the AI-focused headlines, the S&P 500 Equal Weight Index's new highs show market strength is broadening. Capital flowing into formerly lagging areas and strong earnings growth for the median stock suggest a genuine early-cycle economic expansion, not a concentrated tech rally.

Contrary to the belief that only a few mega-cap stocks drive market returns, a significant portion of S&P 500 companies—167 in the year of recording—outperform the index. This suggests that beating the market through stock picking is more attainable than commonly portrayed.

Unlike the speculative internet bubble, today's market is supported by an 'early cycle earnings backdrop' following a recent rolling recession. Capital is not just chasing long-term AI dreams but is also flowing into classic cyclical winners with strong current earnings, indicating a more fundamentally sound recovery.

Following a dovish Fed meeting, the outperformance of small-cap stocks (IWM ETF) versus large-cap tech is the key signal of a healthy, broadening market rally. This indicates capital is flowing beyond mega-cap names into the wider economy, confirming a "game on" sentiment for risk assets.

Market-cap weighting turned the S&P 500 into a momentum fund for megacaps, leading to a decade of outperformance versus its equal-weight counterpart—a historical anomaly. Recent signs of equal-weight taking the lead suggest a potential market regime shift back towards value and smaller companies.