Market concentration is a sword that cuts both ways. So far in June, the S&P 500 ([SPX]) is down 2.57% while the S&P 500 Equal Weight ([SPXEWI]) is up 0.16%.

Market concentration is a sword that cuts both ways. So far in June, the S&P 500 (SPX) is down 2.57% while the S&P 500 Equal Weight (SPXEWI) is up 0.16%. Over the same time frame, the average performance of the top ten weighted stocks in the S&P 500 is -6.88% while the average performance for the rest of the S&P 500 is 0.52%. The voracious move lower in the largest stocks has changed the short-term relative strength picture between SPX and SPXEWI to favor the equal weight representative, as we mentioned in a piece on Monday (click here for more). Nonetheless, we still see the cap-weight maintain its long-term relative strength and has been on a buy signal versus SPXEWI on its 1% RS chart since May 2023. Back to performance from the start of June, while the performance contribution to the S&P 500’s return from other than the top 10 stocks is just 0.01%, just over 60% of those stocks are positive so far in June.

The bifurcation between the mega caps and the rest of the S&P 500 can be seen through the action of the Ten Week for the S&P 500 (^TWSPX) indicator. ^TWSPX was up by over 10% yesterday, while SPX was down 86 basis points. Said plainly, 10% more stocks in the S&P 500 moved above their 50-day moving averages while the index itself was down almost 1%. Undoubtedly, the level of concentration at the top of the index is having an impact on market behavior. Furthermore, the days when the SPX was down more than -0.25% and ^TWSPX up more than 5% have mostly occurred this decade, with history going back to 2001. This bifurcation hasn’t been an issue for markets, the one-year forward return for the SPX following such occurrences was positive except the one in March 2001. However, looking at three month forward returns, there’s been the potential for volatility in both directions. We saw this happen in January last year before the tariff tantrum and in July 2018 before a rough fall for the market over the next six months. However, it’s usually been good more often than bad, as seen in the table below. Overall, increasing market concentration makes the index susceptible to diverge from the rest of the market.