Over the past several years, betting on the market broadening beyond mega cap growth names has generally meant leaving upside on the table—until recently. The Nasdaq-100 (NDX) has outperformed the S&P 500 Equal Weight (SPXEWI)—representing the average S&P 500 stock—by a cumulative 86.8% since the start of 2023. In contrast, SPXEWI has outperformed NDX by 11% since the end of October, highlighting the abnormality of recent market behavior. Given these developments, will the average stocks fall behind again, or will this time truly be different?

One sign of optimism comes from the performance of the average stock versus the Nasdaq-100 and the Invesco QQQ Trust (QQQ) fund that tracks it. The S&P 500 equal weight regained near-term relative strength over QQQ for the first time since the summer of 2024, underscoring the resurgence of the “average Joes” compared to growth stock giants.

Moreover, recent gains have been sharpest outside of large caps. The iShares S&P MidCap 400 Index Fund (IJH) and iShares Russell 2000 ETF (IWM) are both handily beating the S&P 500’s 8.9% gain over the last six months, rising 14.9% and 20.3%, respectively. Sustained broad-based strength has resulted in SPY, IJH, and IWM all scoring above 4.0 for just the second time this century, with late 2020 being the only other recent instance.

Market broadening has also pushed participation within domestic equities to its highest levels in recent memory. Currently, the Bullish Percent for NYSE stocks (^BPNYSE) sits around 62%—its highest reading since late 2024. With more stocks and groups contributing to gains, market fragility should decrease as performance becomes less dependent on a handful of the largest names.

Strength has broadened not only across company sizes but also across the sectors leading the market. As noted in Monday’s report, only three of the eleven major sector SPDR funds managed to beat SPX the last three years. Conversely, recent gains have been driven by sectors beyond technology and communication services. Over the last three months, SPX has been roughly flat, yet eight of the eleven major sector SPDR funds have managed to beat the index.

Lastly, strength has broadened beyond just the US stocks market. Domestic equities sit several signals behind international equities in DALI’s asset class rankings, with commodities and fixed income also delivering solid performances over the trailing year. With so many different sizes, sectors, and asset classes pushing markets higher, continued broadening appears to be a defining theme of early 2026.

Given the widespread strength of financial markets, there appears to be less need for concentrated exposure in single groups like US mega cap growth—unlike recent years. Additionally, broader participation typically benefits trend‑following strategies, which can capitalize on more segments outperforming the benchmark, boding well for momentum as we look ahead to the rest of the year.

As we typically do each quarter, today we revisit the debate between active and passive management by looking at how passive indices have fared across several different markets – US large cap equity, US small cap equity, international developed equity, emerging market equity, and US fixed income – over both the short- and long-term.

2025 provided us with a good opportunity to evaluate active vs passive management as we experienced a major drawdown and subsequent recovery. One of the arguments in favor of active management is that active managers will outperform in down markets. The tariffs that were a major contributor to the downturn had been anticipated for some time, potentially allowing managers to position their portfolios accordingly.

The key determinant of which style, active or passive, is superior is market efficiency. Market efficiency describes the degree to which asset prices quickly and rationally adjust to reflect new information. In highly efficient markets, new information is quickly incorporated into prices, and therefore it is not possible to consistently achieve above-average risk-adjusted returns in these markets. Therefore, due to their lower cost, investors are better off utilizing passive strategies in highly efficient markets. In less efficient markets, on the other hand, the opportunity exists for skilled active managers to outperform passive strategies, thereby adding value for clients.

The active vs. passive debate often focuses on large-cap U.S. equities, which is a natural starting point for the discussion – the large-cap U.S. equity market is composed of the most well-known companies in the world and represents a large portion of many retirement portfolios. However, if we stop there, we ignore what should be an obvious and fundamental element of the discussion – the various markets around the globe are unlikely to all be equally efficient. The very fact that U.S. large-cap companies are the most visible and researched firms in the world suggests that the U.S. large-cap equity market is likely to be more efficient than its less well-known counterparts! It is because of the variation in efficiency that the merits of active versus passive management should be evaluated on a market-by-market basis. 

On the surface, the debate between active and passive may seem academic. However, it has practical implications for advisors. Most importantly, you want to do what is in the best interest of your client. If your client is best served by using low-cost passive funds because active management truly doesn’t add value, then so be it. However, utilizing only passive funds eliminates one of your value propositions as an advisor – evaluating and selecting funds – and removes any possibility of outperformance, so, from a business perspective, it is probably preferable to keep at least some active management in the mix.

The tables below show the quarterly, year-to-date, and rolling five-year return rankings of several well-known indices (representing passive management). If the index ranks in the top two quartiles, then it outperformed most managers within the peer group during that period. Conversely, if the index ranks below the 50th percentile, then most active managers in that universe outperformed the benchmark. Looking at the rankings over time, we can get a feel for which markets are the most efficient, and thus are likely to favor passive management, and which are the least efficient, offering the greatest opportunity for active managers.

The earliest five-year period in our long-term rankings began in September 2016 and the most recent period ended December 31, 2025. During that time, we have experienced several different market environments and market-shaping events from the calm of 2017 to the volatility of 2020 and the tariff-driven drawdown last year. So, we have a good cross-section of market states upon which to base our conclusions.

US Large Cap Equities

The S&P 500 finished 2025 in the second quartile of our rankings, outperforming most active managers in the space. This is in keeping with what we have seen over the long-term as the S&P has finished above the 50th percentile in every rolling five-year period in our lookback window. This does not preclude the possibility that some active managers may have consistently outperformed the benchmark, but over the last decade the S&P 500 has been a difficult hurdle. 

US Small Cap Equities 

Like its large counterpart, the Russell 2000 finished 2025 the second quartile of our rankings. However, unlike large caps, outperformance by the benchmark as been the exception rather than the rule; the Russell 2000 has finished below the 50th percentile in every rolling five-year period in our lookback window, suggesting that active management has been additive in small caps. 

Developed International Equities

The MSCI EAFE Index finished 2025 right around the 50th percentile of our rankings. This is in line with the longer-term trend as the index has hovered around the middle of the rankings in most rolling five-year periods, offering no clear indication of an advantage for active or passive management. 

Emerging Market Equities

Like the EAFE index, the MSCI Emerging Markets Index finished 2025 near the middle of our rankings. However, over the longer-term the rankings indicate an advantage for active management as the index has finished below the 50th percentile in each of the last 14 rolling five-year periods. 

US Fixed Income

As regular readers of this report know, fixed income has provided the most reliable advantage for active management. 2025 was no exception as the Bloomberg US Aggregate Bond Index finished in the bottom quartile of the rankings. In the long-term rankings, the index has finished in the bottom quartile of our rankings in every rolling five-year period in our lookback window.  

Daily Option Ideas for February 12, 2026