The stock market rally broadened today, with the equal-weighted S&P 500 and the Russell 2000 (small caps) leading the way.  Importantly, this represents broader stock market strength.

As we discussed in my note yesterday, the Fed’s Financial Conditions Index had a turning point in October, from an historically tight level.  That turning point was triggered when Jerome Powell verbally signaled the end of the tightening cycle.

And as we also discussed yesterday, turning points from levels of historically tight financial conditions, have been good for stocks in the subsequent 12-month period — especially for small caps.

With that, as the major U.S. stock market indices have been routinely making new record highs, the proxies for broader stock market confidence and demand have been lagging.  The equal-weighted S&P 500 printed new record highs earlier this month (finally recovering the losses of the past two years).

But the Russell 2000 (small caps) remains 15% away from the 2021 record highs.

We’ve talked about the opportunity for small caps, the laggards, to catch up to the performance of the major indices.  The good news, today the Russell traded to the highest level since January of 2022.

With the P/E on the S&P 500 running north of 20, which is historically high, there remains plenty of deeply undervalued stocks for investors to suss out.  That bodes well for this chart above to continue narrowing the losses against its 2021 record highs — and to narrow the divergence in this chart …