NEW YORK (Reuters) - The U.S. stock market rally appears to be expanding beyond the dominant presence of mega-cap growth and technology companies, fueling investor hopes for a strong finish to the year.

November has seen a significant surge in equity prices, with the S&P 500 climbing over 8%, on the verge of reaching a new high for 2023. This rally has been supported by declining Treasury yields and cooling inflation readings, which suggest a potential end to Federal Reserve rate hikes. As Treasury prices rise, causing yields to fall, stocks become more attractive to investors seeking higher returns than those offered by fixed-income investments.

While some larger investors remain cautious, recent indicators of market strength point to a broader uptrend. Notably, as of Monday, approximately 55% of the companies in the S&P 500 were trading above their 200-day moving averages, surpassing the 50% level breached for the first time in nearly two months. This development has been a key factor in suggesting the sustainability of the market recovery, according to Adam Turnquist, chief technical strategist at LPL Financial.

Further evidence of market breadth lies in the rise of the equal-weight S&P 500, which represents the average stock in the index. Last week, this index recorded a significant outperformance of 3.24% compared to the market-cap weighted S&P 500's 2.24% increase. This level of outperformance was the highest in nearly five months. However, it is important to note that the equal-weight index has only gained 3% in 2023, in contrast to the overall S&P 500's notable rise of 18%, marking the largest annual percentage-point gap in 25 years.

The lopsided returns are largely attributed to the exceptional performance of the so-called Magnificent Seven stocks: Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla. Collectively, these stocks hold a 28% weight in the S&P 500 index and account for almost 50% of the weighting of the Nasdaq 100, which has surged by nearly 47% year-to-date.

However, other segments of the market are starting to show signs of life. Small-cap and bank stocks have made notable gains, particularly after the release of October's unchanged U.S. consumer price data. Since the data release, the small-cap Russell 2000 has risen 5.5%, while the S&P 500 banks index has seen a 6.5% increase, outpacing the 3% rise in the S&P 500 as a whole. Despite these recent advances, the Russell 2000 is up only 2% year-to-date, while the S&P 500 banks index has fallen by over 6%.

Mona Mahajan, senior investment strategist at Edward Jones, believes that the current environment, with cooling rates, moderating inflation, and the Federal Reserve remaining on the sidelines, could facilitate a broader market rally. Mahajan noted that when rates start to decline, valuations tend to expand, potentially benefiting areas beyond the large-cap technology sector.

The equal-weight S&P 500, for instance, is currently trading at a 5% discount to its 10-year average forward price-to-earnings ratio, according to Edward Jones. This disparity suggests potential opportunities for investors in non-tech sectors.

However, there are factors that suggest caution. Investors will be closely watching upcoming readings on consumer confidence and inflation. Stronger-than-expected data could lead to a selloff in Treasuries, driving yields higher.

Additionally, the recent surge in stock prices witnessed in the week ending on November 17 was accompanied by high demand for upside call options, particularly in underperforming segments such as the small-cap-focused iShares Russell 2000 ETF. Although the initial hype surrounding these options seems to have subsided, it remains to be seen if the broader market rally will be sustained.

Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, points out that much of the positive news may already be priced into the market. As investors prepare to close their books for the year, there may be hesitancy to chase the rally further.

In conclusion, the signs of a broadening stock market rally have sparked optimism among investors for a strong finish to the year. While the Magnificent Seven stocks have been the driving force behind much of the market gains in 2023, other areas, such as small-cap and bank stocks, are starting to show signs of a resurgence. However, caution remains as upcoming data releases and high demand for call options add uncertainty to the market's trajectory.