Artificial intelligence (AI) has captivated markets and been the key driver of the broader market rally. It wasn't long ago that Meta Platforms was below $1 trillion in market cap and Nvidia was one of the smaller "Magnificent Seven" stocks. Now Nvidia is worth over $2.2 trillion and makes up nearly 5% of the S&P 500!
But it would be a mistake to credit AI for the entire market rally. You may be surprised to learn that rallies are happening across the broader market.
Here are a few sectors to pay attention to, and what they could mean for your investment portfolio.
Image source: Getty Images.
Beyond AI
When looking at the health of a sector, a good place to start is with its most valuable companies. General Electric (NYSE: GE), Caterpillar (NYSE: CAT), and Union Pacific (NYSE: UNP) are the three most valuable U.S.-based industrial companies by market cap.
Walmart (NYSE: WMT), Procter & Gamble (NYSE: PG), and Costco Wholesale (NASDAQ: COST) are the most valuable consumer staples.
Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), JPMorgan Chase (NYSE: JPM), and Visa (NYSE: V) lead the financial sector.
As of market close on March 6, all nine of these stocks are within 3.2% of their 52-week highs.
Year-to-date, financials are actually beating the S&P 500, industrials are less than 1% off the S&P 500's performance, and the consumer staples sector is up over 4% -- which is a big move for one of the safest sectors in the market.
Market leaders are driving the market
The strong performance of the largest companies in these three sectors shows that the market rally isn't just about AI, it's about market leadership across multiple sectors. Strong performances from other sectors is another reason why the S&P 500 is doing so well despite big year-to-date losses from Apple, Alphabet, and Tesla, which collectively make up 10.5% of the entire S&P 500.
Participation from multiple sectors is a sign that the market rally is healthy. The S&P 500 price-to-earnings (P/E) ratio is 27.7, which is significantly above historic levels. Some folks may look at that valuation and say the market is overpriced. But the valuation expansion of the S&P 500 is more a result of tech and other growth stocks making up a larger share of the market, not all sectors being overvalued.
The industrial sector has a P/E ratio of 26.1 -- below the S&P 500. And interestingly enough, GE, Caterpillar, and Union Pacific all have P/E ratios below the sector average.
Meanwhile, the financial sector has a P/E ratio of 18.4 and the consumer staples sector has a 25.7 P/E.
Granted, these sectors should trade below the market average because they tend to have lower growth. And while valuations are higher for many stocks than their historic averages, they aren't so far out of line that it would be a bubble.
The stock market is still worth buying
The recipe for the perfect bull market is earnings growth and valuation expansion. In other words, improving fundamentals and investor optimism. These two qualities are driving today's market, which isn't a bad thing.
Skeptics could point to certain pockets of the market and say that they could burst. But overall, the market is rising for good reasons, not just because investors are greedy.
Investors aren't getting as good of a deal as during the 2022 sell-off. But the deal isn't so bad that investors should stop regularly adding new savings to their investment accounts.
The key takeaway is that the market rally is broader than many folks may realize, and that is an overall good sign that the bull market doesn't solely depend on AI or the tech sector.
