Shares of discount brokers are gaining the most since 2003 compared with the Standard & Poor’s 500 Index, a sign that small investors are joining the four-year bull market even after U.S. stocks suffered their biggest losses in six months.

Charles Schwab Corp., TD Ameritrade Holding Corp. and E*Trade Financial Corp. have climbed 38 percent on average in 2013, beating the S&P 500 by 23 percentage points and eclipsing returns in financial shares from Goldman Sachs Group Inc. to Bank of America Corp., according to data compiled by Bloomberg.

Bulls say a rally in brokers that serve private investors means individuals are preparing to embrace shares after they pulled almost $400 billion from stock funds in the last four years. Bears say buying by individuals who missed the rally shows gains are close to peaking as another pool of untapped demand gets absorbed.

“It says something about an improvement of confidence among our biggest sector of the economy, retail investors and households,” James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees more than $340 billion, said in a phone interview. “When the retail investor finally gets more confident about the future, flows follow.”

The S&P 500 rose last week, snapping two consecutive losses, after American companies hired more employees than forecast in May. The gauge added 0.8 percent to 1,643.38, taking this year’s increase to 15 percent and the advance since March 2009 to 143 percent.

The index fell 3.6 percent between May 21 and June 5, the steepest such decline since November, as investors speculated the Federal Reserve will reduce the bond purchases central to stimulating the economy. The S&P 500 was little changed at 1,642.89 as of 10:27 a.m. New York time today. Schwab rose 0.2 percent, while TD Ameritrade was down less than 0.1 percent and E*Trade gained 0.1 percent.

Schwab, the San Francisco-based brokerage with 6.1 million retail accounts as of March 31, has climbed 40 percent in 2013, including a 24 percent rally since May 1 that is the fifth-biggest in the S&P 500, while Omaha, Neb.-based TD Ameritrade is up 43 percent.

By contrast, Goldman Sachs gained 30 percent in 2013 amid concerns regulations in the Dodd-Frank Act to curb risk-taking by financial institutions will reduce profits. Bank of America is up 15 percent and the KBW Bank Index of 24 lenders’ stocks rallied 20 percent this year.

‘Market Improving’

“We have had a huge run-up in the stock market this year, and when you have the appearance of the economy getting better and the stock market improving you’re going to get more people wanting to come in,” said Jerome Dodson, president of San Francisco-based Parnassus Investments, which oversees about $7.3 billion, in a June 5 phone interview. “It tends to push the market higher.” He owns Schwab shares.

Investors pulled almost $400 billion from U.S. equity mutual funds from 2009 through 2012 while moving more than $1 trillion into bonds, as the worst financial crisis since the Great Depression bolstered the attraction of assets perceived to be the safest. The pace of deposits with fixed-income managers has slowed this year to $18.4 billion a month, the least since 2008, data from Washington- based ICI show.

Individuals are buying and selling more stock. TD Ameritrade’s 417,000 average trades per day last month were 13 percent more than the year-earlier period, according to a June 6 release. At E*Trade, daily revenue-generating trades climbed 11 percent from May 2012, the company said at a conference on June 6. Schwab clients increased trading 3 percent in April, according to a May 14 release.

Earnings Estimates

While S&P 500 earnings are forecast to rise 6.6 percent this year and 11 percent in 2014, analysts are more bullish on Schwab. They predict profits at the broker will increase 10 percent in 2013 and 18 percent the next year, according to estimates compiled by Bloomberg.

E*Trade, which has advanced 31 percent, is projected to return to profit this year and increase per-share earnings by 24 percent in 2014. The growth forecast for banks in the S&P 500 falls to 6.2 percent this year and 5.6 percent next year.