As you probably know, the S&P 500 is not calculated by adding up the closing prices of the 500 component stocks and dividing by 500. Instead, it is weighted based on market cap. This, the company with the largest market cap of $4 trillion, NVDA, would be about 40 times more impactful to the value of the S&P 500 compared to, say, DoorDash, with about a $100 billion market cap.
If the 500 components all moved up and down the same degree, the equal-weighted S&P would be in lockstep with the “normal” market-cap-weighted S&P, and for many years that was pretty much the case. In recent years, however, the standard S&P has been outpacing the equal-weighted one to an increasing degree.
Indeed, even looking at just the past eighteen months or so, the $SPX (market-cap weighted) has about a 50% superior return to the $SPXEW (equal-weighted), and the difference between these two is becoming quite the chasm. Interestingly, during the all-too-brief market weakness in March and very early April, the two indexes pretty much “synched up” again, I suppose because all those juicy profits in giant stocks left in an awfully big hurry. Yet in just the three months since then, the spread between these two is as big as ever.
A different way to see this instead of the percentage graphs above is to use a ratio chart. Below is the chart of $SPXEW/$SPX (that is, the equal-weighted S&P divided by the standard S&P). A strengthening chart means the equal-weighted is beating the standard, whereas a descending chart means just the opposite. As you can see, this chart has been breaking down just like any normal financial instrument would (even though it’s a concocted indicator and now something really tradeable). What it’s telling you, just the same as the earlier charts, is that the daily lifetime highs we’re seeing can be credited largely to the mega-caps, which are doing all the heavy lifting.
Looking more closely, you can see how severely this has been the case since the April 7th bottom.
Thus, if you want to hoist a beer stein in the direction of whatever is powering stocks to lifetime highs every single weekday, you know where to aim!
