We’ve been hearing a lot of talk over the last few days that just a handful of stocks are driving the rally in US equities. This suggests that the gains aren’t representative of broad market strength, but instead strength in just a handful of stocks. We’ll be the first to agree that the S&P 500’s gains this year are the result of gains in some of the index’s largest members, but that’s only because they have grown so large. As we noted earlier this week, the five largest companies in the S&P 500 have a combined market cap of over $2.75 trillion, and the four largest companies in the index have a greater market cap than the entire Russell 2000 small-cap index. Just because the largest companies in the S&P 500 are doing so well doesn’t mean that the rest of the index is doing poorly though.
The first chart below shows the S&P 500 market cap weighted index over the last twelve months. As shown in the chart, after the rally of the last few days the index is currently just 0.52% below its all-time high from 3/1.
Because the S&P 500 is a market cap weighted index, if the largest stocks in the index were driving all of the gains, we would expect the S&P 500 equal-weight index to be underperforming. That isn’t the case, though. In fact, the S&P 500 equal-weighted index is actually down the exact same percentage amount as its market cap weighted peer. With both indices down by the same percentage amount from their bull market highs, it’s hard to argue that just a handful of stocks are propping the market up.