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The Stock Market Is Doing Something It Has Only Done 6 Times in 50 Years. It Could Signal a Big Move in 2025.

Updated: 07-11-2024, 01.17 PM

The S&P 500 (SNPINDEX: ^GSPC) has advanced 80% since 2019, and most of that upside came from a relatively small number of stocks. Apple and Nvidia alone contributed a quarter of the gains, and the Magnificent Seven accounted for half. Consequently, the S&P 500 has become increasingly concentrated. In fact, the 10 largest companies now account for 36% of its market value, which has never happened before.

Some experts expect the situation to end in disaster. Goldman Sachs analysts estimate the S&P 500 will return just 3% annually over the next decade due to its concentration and elevated valuations. That would be a sharp contrast to the long-term average of 11%. But other analysts are less worried due the fundamental strength of the Magnificent Seven, and history says concentration could be a good thing.

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The S&P 500 has outperformed the S&P 500 Equal Weight index by 8 percentage points this year, due largely to strength across its most heavily weighted stocks. That matters because the S&P 500 has only beat its equal weight counterpart by at least 5 percentage points six times in the last 50 years, and strong gains typically followed in the subsequent year.

The S&P 500 tracks the performance of 500 large U.S. companies that cover about 80% of domestic equities by market value. Due to its scope, the index is commonly regarded as the best barometer for the overall U.S. stock market.

Since 1971, the S&P 500 has outperformed the S&P 500 Equal Weight index (EWI) — which includes the same companies, but at identical weights — by at least 5 percentage points just six times: 1990, 1995, 1998, 1999, 2020, and 2023. The chart below shows the S&P 500’s return during the next year.

Year

S&P 500 Return

1991

26%

1996

20%

1999

20%

2000

(10%)

2001

27%

2024

21%*

Average

17%

Data source: YCharts. All percentages have been rounded to the nearest whole number. The asterisk indicates that the full-year return for 2024 is not final and is subject to change.

As shown above, the S&P 500 returned an average of 17% during the 12 months following years in which the index outperformed its equal weight counterpart by at least 5 percentage points.

So what? Assuming the S&P 500 is still at least 5 percentage points ahead of the S&P 500 EWI by the end of 2024, history says the index will return 17% in 2025. Of course, past results are never a guarantee of future performance, but there is another reason to expect strong returns in the S&P 500 next year.

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