For the past few years, most of the gains seen by major U.S. equity indexes such as the S&P 500 and the Nasdaq composite were driven by a handful of megacap stocks. But recently, that dynamic has started to change.
As a result, the benchmark S&P 500 SPX, the market-cap-weighted index that’s defined the U.S. stock market for generations of investors, is underperforming its equal-weighted sibling XX:SP500EW by the widest margin at this point in the year since the early 1990s.
Such divergence has only been seen a few other times in the past quarter-century, and it has historically coincided with a major reshuffling of market leadership.
The S&P 500 equal-weighted index has risen 5.5% during the first 32 trading sessions of the year, outpacing the tiny 0.1% gain for the traditional market-cap-weighted index. That’s the most extreme gap at this point going back to 1992.
Should this divergence persist throughout the year, it would mark the widest outperformance for the equal-weighted S&P 500 since 2022. Typically, the equal-weighted index keeps pace with its capitalization-weighted sibling, or lags behind. But investors have seen it jump into the lead on a handful of previous occasions. One was around the dot-com bubble peak of the early 2000s. Another came during the aftermath of the 2008 global financial crisis, as well as the COVID-era bear market in 2022, according to Dow Jones Market Data (see chart below).
“It’s a shift in market leadership, and it’s more comparable to the 2000 dot-com bubble,” said Diana Baechle, senior principal of investment decision research at SimCorp. “There’s a similar situation here where you have investors trying to figure out which technology companies will benefit from AI development and which will not.”
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Investors rotated away from speculative internet companies that had driven massive gains and into value-oriented sectors when the dot-com bubble burst in 2000. Following the financial crisis in 2008, investors favored sectors tied to economic recovery, including financials, consumer discretionary and industrials, while technology also held up amid a broader market rebound. During the 2022 bear market, megacap growth stocks fell out of favor as the U.S. economy grappled with the highest inflation in four decades and quickly rising interest rates.
Historically, shifts in market leadership have unfolded against the backdrop of major economic upheavals. This time, the U.S. economy has been looking resilient, leaving investors wondering whether if this recent rotation in leadership away from Big Tech signals a healthy broadening of market participation, or the first sign of stress beneath the surface.
Baechle told MarketWatch that the outperformance in the equal-weighted index could continue in 2026. That means the broader stock market could be at risk of a drawdown, given that the so-called Magnificent Seven group of tech stocks — taking up roughly 30% of the market-cap-weighted S&P 500 — would no longer be able to carry the benchmark index higher.
“But the health of the market is getting better because you have more companies outperforming, so the market overall is gonna auto-correct itself,” she said.
The stock market kicked off the new year with some of the previously-lagging sectors leading Wall Street higher while the “Magnificent Seven” MAGS came under pressure amid concerns over Big Tech’s massive AI spending. Earlier this month, software names, among the biggest stars of the U.S. stock market during the 2010s, also got hammered as AI innovations threatened to encroach on their core businesses. The selloff in the software space has rippled through the broader tech sector, with investors shedding stocks of all companies perceived to face risks of being displaced by AI technology.
As a result, the S&P 500’s energy sector XX:SP500.10 has been the best performer among the index’s 11 sectors, up 22.7% so far this year, while consumer staples XX:SP500.30 stocks have risen 12.7% and the industrials sector XX:SP500.20 was up 13.1%. At the other end of the spectrum, the tech-heavy information-technology XX:SP500.45 and consumer-discretionary XX:SP500.25 sectors were off 4.5% and 5%, respectively, according to FactSet data.
Andrew Briggs, director of portfolio management and wealth manager at Plaza Advisory Group, said the market rotation started off in late 2025 as “a mean-reversion trade” as tech stocks became overvalued and investors favored cheaper alternatives like small caps RUT and value stocks.
However, in the first two months of 2026, it is beginning to look like “a fundamental story” as the focus has moved beyond the companies directly building AI to how the broader market is being impacted, he said.
“Non-AI companies start to figure out how much productivity they’re going to be able to get out of this, through cost savings and margin expansion, and so you’re seeing that in the earnings,” Briggs told MarketWatch in a phone interview.
Of course, it’s still too early to tell how the broader market will benefit from the AI innovation, or who the winners and losers will be. According to Briggs, the real wildcard for investors in 2026 is the Federal Reserve’s interest-rate policy.
On Wednesday, minutes of the Fed’s first meeting of the year showed that several officials wanted the central bank to tell the markets there was a chance its next move might be to raise interest rates. Fed-funds futures traders were expecting policymakers to cut rates twice in the second half of 2026, according to the CME FedWatch Tool.
If investors don’t receive the rate cuts that many have come to expect this years, cyclical sectors, which have helped power the equal-weighted index’s advance, could face significant pressure. The economically sensitive sectors are particularly vulnerable to higher interest rates because higher borrowing costs typically dampen consumer demand and capital spending.
“Outside of earnings, one thing that would deflate the equal-weight from outperforming, would be the overall macro liquidity landscape,” he said. “From a pure fundamental standpoint, these companies are looking stronger, which is great, but from a macro perspective, I do question how much of these cuts we’re actually really going to see, which would be my concern.”
U.S. stocks were lower on Thursday. The S&P 500 was off 0.3%, while the Dow Jones Industrial Average DJIA fell 0.5% and the Nasdaq Composite COMP dropped 0.3%, according to preliminary data from FactSet.
Mike DeStefano contributed