Wednesday at 2pm EST the Fed released its policy statement explaining its March rate decision and forward outlook. At 2:30pm EST Chair Powell held a press conference. In the wake of the Fed’s maintaining its outlook for three interest rate cuts this year and the sense that the first one will be in June, the S&P broke out above 5200 to new all time highs.

But the character of the rally has been different from what came before. The Magnificent 7 which dominate the S&P, and especially the QQQ, and have driven the bull market have performed fine but small caps (IWM) and the equal weight S&P (RSP) have been the stars. IWM was +3.14% Wednesday and Thursday compared to QQQ +1.66%. RSP at +1.56% also held its own.

Bulls and bears alike have noted the narrowness of the rally with bulls expecting it to broaden out and bears expecting The Magnificent 7 to peter our sooner or later. With IWM and RSP taking the lead, clearly the bull thesis is being validated in the wake of the Fed.

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But I’m not entirely convinced. Clearly participation is broadening in the S&P 500 as RSP has broken out to new all time highs above $158 from two years ago. The problem is that these stocks are too small relative to the size of The Magnificent 7 to mask weakness there and push the market cap weighted indexes higher on their own.

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QQQ is struggling with $445 and unless we get another leg higher there, even with the broader participation, the broader indexes will come under pressure. Perhaps it is just a rotation for now as the QQQ consolidate for the next leg higher. If so, we are likely to have only a correction within the bull market. But if The Magnificent 7 are truly exhausted, the S&P is very close to topping out for a long time.

In other words, The Magnificent 7 are still the name of the game because their overwhelming size dominates the market cap weighted indexes. Broadening participation within the S&P is bullish, but the major indexes will only go as high as the Mag 7 take them.

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