Why the stock market's sharp rally off March lows is even stronger than in seems, according to one Wall Street chief strategist

• The market's leadership is wider than perceived and consists of more than just the largest tech stocks, James Paulsen, chief investment strategist at The Leuthold Group, said Friday.
• While cyclical sectors trail the S&P 500 by 5% on a market-weighted basis, they exceed the benchmark on an equal-weighted basis, Paulsen highlighted.
• Similarly, the S&P 500's outperformance over the small-cap-focused S&P 600 is halved when market weighting isn't taken into account.
• Strong gains from tech giants "distorted many traditional market signals" and possibly shifted investors' views of the market, the strategist added.
• Visit the Business Insider homepage for more stories.

Cyclical and small-cap stocks aren't getting the credit they deserve for the market's rapid recovery, James Paulsen, chief investment strategist at The Leuthold Group, said Friday.

Tech giants played an undeniably large role in lifting indexes from their March lows. Crowding in mega-caps hit dot-com-era levels, and their outperformance led the Nasdaq to be the first major index to erase its pandemic-induced losses. Strategists warned of a bubble forming in the market and that leadership in the months-long rally was dangerously thin.

Yet certain gauges suggest the bull market's drivers are more varied than just the popular tech giants. While cyclical sectors trail the S&P 500 by roughly 5% on a market-weighted basis, they've made a full recovery from the March trough and now outpace the benchmark on an equal-weighted basis, Paulsen said.

Read more: 'The largest financial crisis in history': A 47-year market vet says the COVID-19 crash was merely a 'fake-out sell-off' — and warns of an 80% stock plunge fraught with bank failures and bankruptcies

"Cyclicals have not done as well as the FAANGs — few stocks have — but relative to others, they have been leaders since the March market low, they've posted particularly strong outperformance since August, and are now outpacing year-to-date," he added.

Small caps have similarly played an underrated role. The S&P 600 — a popular index for small-cap stocks — still trails the S&P 500 by more than 16% on a market-weighted basis. Yet the performance gap shrinks to 8% when viewed on an equal-weighted basis.

While largely neglected by investors, smaller firms "have done much better in recent months" than tech-heavy indexes would let on, Paulsen said.

Outsized gains from tech giants "distorted many traditional market signals" and potentially impacted investors' views of the market, he added. Small-cap and cyclical performances have been "more encouraging than widely perceived," and the continued economic recovery stands to lift the ignored stocks even higher.

Now read more markets coverage from Markets Insider and Business Insider:

'The largest financial crisis in history': A 47-year market vet says the COVID-19 crash was merely a 'fake-out sell-off' — and warns of an 80% stock plunge fraught with bank failures and bankruptcies

Stocks face a turbulent path forward if Democrats sweep in November, Morgan Stanley says

Shaquille O'Neal, former Disney executives, and Martin Luther King Jr.'s son target $250 million SPAC launch