Is The Bull Market Broadening Or Rotating?

Many investors are wondering if the recent outperformance of the S&P 400 and the S&P 600 (i.e., the "SMidCaps") and the equal-weighted S&P 500 reflect a sustainable broadening of the bull market. Or is it a temporary rotation out of the Magnificent-7 into the S&P 493 and the SMidCaps? For now, we're in the camp that breadth is broadening to the S&P 493, but we're not convinced that the SMidCap rally has legs. Here's why:

(1) Forward earnings. Analysts' consensus expectations for LargeCap stocks' forward earnings have continuously climbed to new record highs this year (chart). Forward earnings for SMidCaps, on the other hand, still remain below their 2022 peaks.