The rise of the “mega-caps” in recent years has caused a significant divergence in the performance of the S&P 500 — which is market cap weighted — and the S&P 500 Equal Weight index.  As the mega-caps like  Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), and NVIDIA (NVDA) have pushed ever higher into multi-trillion dollar companies, their weight in the S&P 500 has ballooned to more than 25% of the index.  In the S&P 500 Equal Weight index, however, where each of the 500 stocks has a 0.2% weighting after quarterly re-balancing, the six mega-caps make up just 1.2% of the index.  Given these differences, it’s easy to see how the performance between a cap-weighted and equal-weighted index can diverge.

As shown below, the cap-weighted S&P 500 has posted a total return of just over 110% over the last five years compared to a gain of roughly 84% for the S&P 500 Equal Weight index.  As you can see in the chart, the gap between the two didn’t really start widening until early on during this bull market in early 2023.

Anecdotally, the cap-weighted version of the S&P 500 seems to be getting all the love these days, with some calling it the perfect momentum index.  Combining that recent sentiment with the very clear differences between the two indices, readers may be surprised that the longer-term performance between the two has been similar and even tilts towards the equal-weight version.

As shown below, over the last 20 years, the cap-weighted index has just recently overtaken the equal-weighted index on a total return basis, but outperformance has gone back and forth many times over this time frame.

And since 1990, the equal-weighted version of the S&P has actually been the clear winner over the cap-weighted version.

As you can see in the chart below, the Dot Com Bubble of the late 1990s pushed the cap-weighted S&P solidly above the equal-weighted version in the final years of that bubble, but the bursting of the bubble and the 2003-2007 bull market resulted in a performance shift that allowed the equal-weight index to pull ahead.  While the mega-caps of today have had a leg up on the rest of the market for the past few years, an extended period of underperformance from them would allow the equal-weighted version to become en-vogue again.

Below is a look at the differences in sector weightings for the S&P 500 (cap-weighted) and S&P 500 Equal Weight indices.  By default, the sectors with the largest number of stocks in the index will have the highest weightings in the equal-weight index.

While the Tech sector makes up nearly a third of the cap-weighted index, it’s only 13.7% of the equal-weight index.  Industrials and Financials each have a larger weight than Tech in the equal-weight index, while they combine for a weighting that’s just 2/3 of Tech’s weighting in the cap-weighted index.

When looking at the pie charts below, it’s the equal-weight version that appears more balanced and diversified at the moment.  No sector has a weighting below 4.4% in the equal-weight index, while the cap-weighted index has four sectors with weightings below 3.3%.  Movements in Materials, Real Estate, Utilities, and Energy have virtually no impact on the cap-weighted index as a whole these days.

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Tuesday was a great day for Philip Morris International (PM). The company manufacturers and sells tobacco products internationally in over 180 countries, best know for its Marlboro brand. The company was spun off of Altria (MO) back in March 2008 as a way to separate its domestic and international operations.  The stock surged 10.47% in Tuesday’s session in a move that entirely erased a drawdown that had been underway since the summer. From a technical standpoint, headed into earnings the stock was also stuck under resistance as it butted up against its 50-DMA. But Tuesday’s move fully erased all of the past month’s losses.

The catalyst for Tuesday’s move was earnings.  PM reported its eleventh earnings triple play in its history and the first since February 2023.  An earnings triple play is a term we coined back in the mid-2000s for a company that reports 1) better than expected EPS results, 2) better than expected revenue results, and 3) raises forward guidance.

In response, the stock rose over 10% for not only its best reaction to earnings on record, but also for its third best day of any session dating back to 2008 when the company was spun off of Altria Group. Those other days with over 10% gains were March 13, 2020 and October 13, 2008.

Below we show a snapshot from our Earnings Explorer tool which includes the 20 earnings reports with the strongest upside stock price reactions for Philip Morris International (PM) since it began trading back in 2008.  Again, yesterday was its single strongest response to earnings to date.

Of course, a higher stock price can put a dent into dividend yields.  Given the size of yesterday’s move higher, PM’s dividend yield dropped from 4.54% on Monday to 4.15% on Tuesday. That 39 bps drop is the largest single day move in PM’s dividend yield since the spring of 2020, and it leaves the yield around one of the lowest levels since March 2018.  While PM’s yield is down significantly on the move and now sits in the bottom quartile of its historical range, we would note that it still holds the 37th highest yield of all S&P 500 members.

Perhaps more notably, while the dividend yield of Philip Morris International is still high relative to other stocks, uncharacteristically the opposite is true relative to bonds.  In the chart below, we show the spread between PM’s dividend yield and the yield on the 10-year Treasury.  As shown, for the vast majority of the stock’s history (barring a brief period shortly after the spin-off), PM had a yield larger than that of the 10-year.  But yesterday’s 10%+ share price gain puts the stock’s dividend yield below the 10-year Treasury yield by roughly 5 bps.

While the relative attractiveness of PM’s dividend has perhaps taken a hit, the strong results of earnings means that the safety of the yield has become more attractive.  In the chart below, we show the dividend payout ratio of Philip Morris. This ratio shows the percentage of earnings that a company pays out through dividends.  Even after raising its dividend last month, PM’s dividend payout ratio has fallen down to 68.3% which is the lowest reading since Q3 2013.