Drivers of the S&P 500 Rally

The S&P 500 has experienced a significant rally of around 25% since the beginning of the year, largely fueled by earnings growth and valuation expansion. Major contributors to this rally include large-cap stocks known as the 'Magnificent Seven,' which have seen an impressive increase of 36% this year, compared to the 17% average rise for typical stocks. Unlike previous years, where a greater proportion of returns stemmed from valuation increases, the current rally has been more balanced, indicating that both earnings and valuations are playing critical roles. This shift suggests that while valuations may be high relative to historical standards, the trajectory of the index will increasingly depend on future earnings performance.