MW Tesla and Nvidia dominated the stock market last year. Why more pedestrian names can shine in 2025.

By Joseph Adinolfi

This year could be a good one for the 'average' S&P 500 stock. Here's how to play it.

The average S&P 500 stock had a tough go of it in December. But better times could lie ahead in 2025.

December wasn't exactly a great month for stocks, but the traditional capitalization-weighted S&P 500 SPX still managed to steamroll its equal-weighted sibling XX:SP500EW. By the time the ball dropped on New Year's Eve, the S&P 500 had outperformed its equal-weighted version by nearly 4 percentage points - the widest gap for any month since June, and the seventh-widest going back to 1990, Dow Jones Market Data showed.

It isn't hard to see why. While shares of a handful of megacap companies - most notably Tesla Inc. $(TSLA)$ - continued climbing, many other stocks struggled. At one point, the number of stocks in the S&P 500 that were falling outpaced the number that were rising for 14 straight sessions, the longest streak on record going back to at least the end of 1999, per Dow Jones data.

As a result, 2024 finished largely how it began, with a small number of stocks doing most of the heavy lifting (although even the traditional S&P 500 finished December in the red).

For the full year, the traditional S&P 500 outperformed the equal-weighted index by 12.4 percentage points, after outperforming it by 12.7 percentage points in 2023.

Taking this into account, the struggles of the average S&P 500 stock late last year might not seem all that notable - after all, it isn't exactly a new trend. But Dow Jones data showed that the S&P 500 has now tallied a double-digit outperformance compared with its equal-weighted peer for two consecutive years. That's the first time this has happened since at least 1990.

That's a notable gap, and it speaks to how megacap stocks - loosely defined as companies with a market value north of $1 trillion - have seen their influence over the broader market grow since the start of the current bull market in October 2022. These stocks exert a much stronger influence over the traditional S&P 500 and the direction of the market-cap-weighted index.

The equal-weighted index, as its name suggests, treats shares of each member company equally, making it a better barometer of how the average S&P 500 stock is doing.

In investing, it's always tempting to stick with what works. But in this case, history shows that investors might want to consider betting on a reversion to the mean, according to Jason Goepfert, chief research analyst and founder of SentimenTrader.

After crunching the numbers, Goepfert found that following months where the equal-weighted index struggled relative to its capitalization-weighted peer, the roles typically reversed over the next year.

To be sure, there have been some notable exceptions. After lagging the S&P 500 in 2023, the equal-weighted index continued to dramatically underperform in 2024. But history suggests investors might now have reason enough to tempt fate.

"For a while now, it has been tempting to assume that the average stock will make a comeback versus the top-heavy version of the index, and these big monthly declines add to that temptation," Goepfert said.

As further proof of how much the average stock has lagged, Goepfert pointed out that as of Monday's close, 10 consecutive sessions have passed with no more than 1% of S&P 500 stocks hitting a 52-week high.

That might not seem like a long time. But it's only the 12th instance since the financial crisis that this has happened. Most of these previous examples unfolded during broader market pullbacks - not when the S&P 500 was trading within a couple of percentage points of its latest record high.

These days, it's easier to make a fundamental case for investing in the average S&P 500 stock. Two years of rampant gains for the megacaps has left the traditional S&P 500 more top-heavy than it has been in decades.

So far, investors have been able to justify this lopsided performance because megacap companies were generating the lion's share of the earnings growth for the index. But Wall Street analysts expect other companies to contribute more profit growth in 2025.

Starting in the fourth quarter of 2024, the gap in earnings growth between the so-called Magnificent Seven stocks and the other 493 companies in the index is expected to narrow.

In fact, there are signs that the process of mean reversion may have already begun. The equal-weighted S&P 500 outperformed its sibling by nearly 0.8 percentage points on Tuesday, the most in any session since Sept. 3, Dow Jones data showed.

Retail investors looking for exposure to the equal-weighted S&P 500 can invest in the Invesco S&P 500 Equal Weight ETF RSP.

Ken Jimenez contributed reporting.

-Joseph Adinolfi

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January 08, 2025 06:00 ET (11:00 GMT)

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