As the acceleration of money supply growth, smaller companies may be easier to grow. Therefore, these smaller companies may lead the next stage of market rebound.
Zhitong Finance APP learned that the S&P 500 index has set multiple new highs in 2024, with a cumulative increase of 15% in the first half of the year, which is 50% higher than the bear market low point in 2022. However, the rebound of the S&P 500 index is led by the largest companies. In fact, market concentration is at the highest level since the 1970s.
The rise of market concentration is the result of several factors. Many large technology companies have seen steady growth in revenue due to their advantages in the AI boom. However, historically, the trend of increasing market concentration may be reversed soon.
US money supply growth once again.
Khuram Chaudhry, head of JPMorgan's European quantitative strategy, pointed out that historically, the decline in the growth rate of money supply is related to the increase in stock market concentration. When loose money supply makes it easy for funds to obtain at low costs, small companies are more likely to grow; when money supply is tight, large companies have advantages in using existing cash flow and balance sheet to provide funding for growth.
Data shows that since 2021, M2 money supply, which measures the amount of US money supply, has begun to decline. By 2022, against the background of the Fed's tightening of monetary policy, M2 money supply showed a negative growth rate year-on-year. This situation also occurred in the first quarter of this year.
However, the M2 money supply in the United States has finally started to grow again. Data shows that in April and May, US M2 money supply grew by about 0.6% year-on-year. Although still far below the peak level since 2022, the market finally sees an increase in liquidity. And later this year, the Fed may cut interest rates, which could further increase money supply. Fed Chairman Powell expects to cut interest rates only once this year, but many analysts believe this is too conservative. Futures markets show that most traders currently expect the Fed to cut interest rates at least twice by the end of this year.
As mmf supply accelerates, smaller companies may be more likely to grow. Therefore, these smaller companies may lead the next stage of market rebound.
How to invest as money supply accelerates?
If loose monetary policy will reverse the trend of increasing market concentration, investors can invest in several ways. In the case of decreasing market concentration, the most direct investment method is to invest in equal-weighted index funds, such as Invesco S&P 500 Equal Weight ETF.
Another option is to invest in stocks outside of the S&P 500 index components. The decline in market concentration will benefit small and mid-cap stocks. Buying the Russell 2000 index fund, such as the iShares Russell 2000 ETF, is a good way to invest in small-cap stocks.