Market Watch: S&P 500 Market Cap vs. Equal-Weight

October 17, 2020    |    Sage Capone

There’s been a lot of distortions in the economy and market this year for Hawaii investors, but none more visible than the market cap weighted S&P 500 compared to the rest of the market.

The S&P 500 is up about 5% YTD through September. Outperforming the equal weighted S&P 500 by about 10% YTD.  Which is historically a very wide margin.

Market Cap Vs Equal Weight Year-To-Date Chart

Actually, 2 of the largest stocks in the S&P 500, Apple and Amazon, account for more than 100% of the S&P 500 market cap weighted return.

While, the remaining 498 stocks, as a group, actually produced a negative return.

Apple & Amazon Stock Returns Vs Returns of Rest of S&P 500

The concentration in the top 5 stocks in the S&P 500 represented by the yellow line is near 24%. Historically after periods of concentration, it reverses. The reason it reverses is because the top stocks, end up being overvalued relative to the rest of the market.

Top 5 S&P Stocks Valuation Vs Rest of S&P 500 Stocks

In this case, these 5 stocks traded at 28% valuation premium to the rest of the market. The relative performance and market cap weighted versus equal weighted, goes back-and-forth.

Currently, we are nearing an extreme, where market cap weighted has outperformed and getting to a point where it reverses and equal weight starts to outperform.

Market Cap Weighted Indices Performance Vs Equal Weighted Indices

Historically after concentration peaks, equal weighted outperforms market cap weighted over the next 3 years, by about a pretty decent margin.

The reason this is important is because of equal weighted S&P 500 is a good proxy for how well a diversified equity portfolio does relative to the market cap weighted S&P 500.

After Concentration Peaks for Equal Weighted Index

While most diversified equity portfolios have under-performed market cap weighted this year. That trend will ultimately reverse for Hawaii Investors with the right approach to retirement planning.

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