The 'Everything Rally' Won't End Anytime Soon

It's not just the biggest stocks. Everything is soaring...

The S&P 500 Index had an incredible second quarter. It was up 15% in three months. That's its best quarterly return since 2020.

The best part is, the rally wasn't just driven by the Magnificent Seven or large-cap stocks. Mid-cap stocks also jumped higher... as did small caps.

A broad market rally like this is darn rare. And based on history, we can expect stocks of all sizes to keep soaring in the months ahead.

Let me explain...

Small Stocks Could Soar 39% Over the Next Year

When stocks are rising, they usually keep rising. That's true of large stocks. It's true of medium-sized stocks. And it's true of small stocks.

Last week, we broke down what happened to the S&P 500 following similar big quarterly wins.

But medium and small stocks had an incredible quarter as well...

First, the S&P 400 Index – the benchmark for mid-cap stocks – was up 14% in the second quarter. That was its highest quarterly return since the end of 2020. And we've seen 12 similar quarterly rallies since 1991.

Here's what happened after those cases...

The results here are similar to the S&P 500's. After a great quarter, mid-cap stocks tend to keep rallying. We can expect outperformance moving forward... especially in the next six months.

Next, we'll look at small-cap stocks, based on the S&P 600 Index. This index had a massive 19% gain in the second quarter. Again, that was its best quarter since 2020.

Here's what happened after the five similar setups we've seen since the data begins in 1994...

It's the same story... but even more extreme. Over six months, the typical small-cap rally following a historic quarter was 20.1%. And over a year, the typical gain was 23.5%. That's incredible outperformance.

Obviously, this is a unique time in the stock market. Everything is soaring. And history tells us that this rally will continue. But the setup is even better than anyone realizes...

You see, even in powerful booms, it's rare for small, medium, and large stocks to all soar at these levels. To see just how uncommon this setup is, I looked for cases when all three indexes mentioned above triggered a quarterly extreme at the same time.

Since 1994, that has only happened three times: June 2003, as we exited the dot-com bust... June 2009, as we came out of the global financial crisis... and June 2020, after the COVID-19 pandemic had upended the world.

You probably know that those were darn good times to buy. But the numbers will still surprise you. Here's what happened for each group after those setups...

These rare setups led to one-year gains of 22.1% in large-cap stocks, 33.1% in mid-cap stocks, and a staggering 39.4% in small-cap stocks.

Those returns are almost too good to believe. But when everything is soaring, it all tends to keep soaring. And these environments are some of the best you could ever hope for as an investor.

Small caps in particular are positioned for a potentially massive move over the next year. And after years of underperformance, few investors own that group today. But you shouldn't ignore this part of the market right now.

Of course, today feels different from the previous examples of crisis and recovery. We're not coming out of a major market bottom. But we did have a painful shake-up in the first quarter.

Now, we have strong momentum in place. And history shows it will continue.

So don't worry. Stay invested. And make sure you own more than just the biggest stocks.

Stocks of all sizes are positioned to outperform over the next year... and the greatest opportunities may come from the small-cap stocks that have been overlooked until now.

Good investing,

Brett Eversole