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Good morning. It’s no surprise that the equal-weighted S&P 500 spent the past three years in the shadows of its cap-weighted sibling. With tech stocks accounting for a third of the cap-weighted index’s weight, the largest sector by far, the benchmark index and the tech rally went largely hand in hand. Historically, it has been a coin flip; the equal-weighted index has underperformed in 18 out of the past 36 years.
But the tide is turning as a tech slump combined with a rotation into unloved sectors such as energy, industrials and staples reverses the trend of the last few years.
The last time we saw a reversal this dramatic was in 2000, when the equal-weighted S&P 500 surged nearly 18 per cent against the cap-weighted index following years of underperformance during the dotcom bubble Is history repeating itself? It will depend largely on how the AI revolution plays out.
Sam Stovall at CFRA argues the equal-weight index story is more than just sector rotation. Other tailwinds Stovall pointed to include the US Supreme Court’s ruling overturning tariffs, which Stovall forecasts will allow inflation to moderate in the months ahead, thereby justifying additional rate cuts. Looking at forward price/earnings ratios, the equal-weighted S&P 500 is also trading at about a 20 per cent discount compared to the cap-weighted index, indicating some comeback potential. Is there more potential for stocks outside of AI and Big Tech? Let us know your thoughts: unhedged@ft.com.
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