When entering a battle, an army needs strength from both its generals and soldiers to secure victory. Given the importance of the two groups, where do the generals (mega caps) and soldiers (average stocks) stand as we enter 2026?
When entering a battle, an army needs strength from both its generals and soldiers to secure victory. Generals are helpless when abandoned by their troops while soldiers are lost without the direction of their general. Just like a battlefield, the stock market requires a delicate balance between the strength of its largest and average names to move higher. An ideal bull market features strong performances from both the generals and soldiers. While markets can rise at the hand of just one of those groups, they do so more easily when both contribute to the upside. Given the importance of the two groups, where do the generals and soldiers stand as we enter 2026?
The past few years have put greater focus on the relationship between mega cap stocks serving as generals and the average stocks soldiering behind them. The generals have been leading the battlefield since 2023, with stocks like the magnificent seven carrying the market higher while the soldiers took a backseat. That’s not to say the soldiers haven’t moved higher, only that the magnitude of gains from the generals has been stronger.
Over the last three years, the Invesco S&P 500 Equal Weight ETF (RSP) is up 31.5%, which is a solid period for average stocks. However, the fifty largest companies have done significantly better than that. The Invesco S&P 500 Top 50 ETF (XLG) is up 104.8%, meaning that the generals have more than tripled the performance of the soldiers. For reference, the outperformance in favor of XLG is the largest since its index’s inception in 2002. Some have seen this cap weight outperformance as potential for greater market fragility, and while it does present a very real risk, history has shown that a preference towards either the generals or soldiers can last for an extended period, as was the case for the soldiers in the 2000s and much of the 2010s.
Another measure of whether the soldiers are entering or leaving the battlefield is the bullish percent indicator, which measures the percentage of stocks trading on a buy signal. Since the end of May, the market has continued to move higher, seeing the S&P 500 (SPX) gain 16.2%. Despite those gains, more soldiers have been leaving the battlefield during that period. The bullish percent for the S&P 500 peaked in mid-May but its one-month average has steadily been declining since then. Periods where indices and participation move in opposite directions are typically referred to as “bearish divergences,” signaling increased fragility due to the market’s dependence on just a few names. The last divergence occurred at the end of 2024, preceding declines in the early part of this year. That said, there are still plenty of reasons to be optimistic.
A divergence only becomes dangerous if the generals materially weaken. The magnitude of gains from the generals means they’ve earned significant relative strength. Mega cap representative XLG currently holds a near-perfect fund score of 5.67, which is 1.75 points higher than the average US fund. The fund has traded in a positive trend since 2015 and is on a streak of two consecutive buy signals. Additionally, it’s displayed both near and long-term relative strength on its market RS chart since 2023. With domestic equity leadership headlined by mega caps, the generals appear well positioned to maintain their ground. That said, when a battlefield is led disproportionately by the generals, their loss would have a greater impact, making it more crucial than usual to monitor the general’s health.
Another cause for optimism is that the soldiers have begun to advance once again, even outperforming the generals over the last month. The bullish percent for the S&P 500 bottomed out at 38% two weeks ago but has since rallied higher to the 54% level, potentially ending the recent divergence. Meanwhile, the Invesco S&P 500 Equal Weight ETF (RSP) is up 2.2% since the start of November—2.5% higher than the 0.3% loss for XLG over that same period. Though, the soldiers still have plenty of ground to cover if they want to catch up with the generals. Over the last year, XLG is up 20.2% compared to only 4.9% for RSP.
Understanding the strength of the generals and soldiers helps not only with understanding the broader market but also which areas to target. Equal weight fund RSP holds a poor fund score of 2.77, which is 2.9 points worse than XLG. With the generals continuing to display some of the most long-term strength, the largest stocks could be of greater emphasis relative to mid-sized companies. Meanwhile, it might be beneficial to target cap weighted funds rather than equally weighted ones.
The soldiers and generals are both advancing on the battlefield for now, with the generals still contributing disproportionately to market strength. However, every trend comes to an end eventually. If the market’s largest companies faulter, it could spell significant danger if the soldiers aren’t there to back them up.
