2024 was the year of megacap stocks, which drove the S&P 500 significantly more than the equally weighted S&P 500 Equal Weight Index. But could this balance of power be reversed in 2025? Experts are discussing whether smaller stocks could reclaim the stage.
• Strong performance from megacap stocks in 2024
• S&P 500 outperforms S&P 500 Equal Weight Index
• Are the roles now reversed?
Last year ended similarly to how it began, with a small number of stocks accounting for most of the uptick. Tech giants like NVIDIA, Tesla & Co. were able to record strong profits.
It could be tempting for investors to continue betting on these stocks – and therefore on what worked last year – in the new year. However, according to Jason Goepfert, principal analyst and founder of SentimenTrader, history shows that investors may want to bet on a reversion to the mean, MarketWatch reports.
S&P 500 outperforms equal-weighted counterpart
In 2024, the traditional S&P 500 outperformed the S&P 500 Equal Weight Index, which treats each member company’s stocks equally, by 12.4 percentage points. In 2023 it had already exceeded it by 12.7 percentage points.
However, the fact that the equally weighted index has lagged significantly behind the performance of the S&P 500 for two years in a row is rather the exception. As Goepfert noted when analyzing the numbers, after the equally weighted S&P 500 lagged the S&P 500 for months, it’s actually common for the roles of the two indices to reverse over the next year. Investors could now have an opportunity in stocks that have performed less well.
After two years of enormous gains among megacaps, the traditional S&P 500 is more top-heavy than it has been in decades. “It’s been tempting for some time to expect the average stock to make a comeback against the top-heavy version of the index, and these big monthly declines only increase that temptation,” MarketWatch quoted Goepfert as saying.
Will there now be a reversal?
Investors previously could have justified the S&P 500’s strong performance relative to its equal-weighted counterpart by saying that megacap companies generated the bulk of the index’s earnings growth, but Wall Street analysts would now expect other companies to contribute more to earnings growth this year .
According to MarketWatch, the gap in earnings growth between the “Magnificent Seven” companies (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, Tesla) and the rest of the companies in the index is expected to narrow from the fourth quarter of 2024 – and there is Signs that the process of reversal may have already begun.
Since the beginning of the year, the S&P 500 Equal Weight Index has recorded an increase of 2.24 percent, while the traditional S&P 500 has increased by 0.95 percent (as of: closing price on January 16, 2025).
Editorial team finanzen.net
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