The S&P 500’s recent climb has been driven by a tiny cluster of mega-cap tech names, leaving many broad-based, equal-weight strategies lagging—an outcome that matters now as investors decide whether to protect portfolios from concentrated risk or simply ride the market’s narrow advance. With market breadth near levels unseen since the dotcom era and AI-linked stocks accounting for a disproportionate share of gains, the choice affects returns and vulnerability going forward.
For years, financial advisors urged long-term investors to “stay the course.” That advice still has merit, but the index itself looks different today: a handful of companies are carrying much of the rally, while hundreds of other constituents show little or no participation.
Equal-weight S&P 500 funds—vehicles that give each constituent roughly the same portfolio weight—were proposed as one hedge against this concentration. Yet through much of 2026 they have underperformed the traditional, market cap-weighted S&P 500. September was especially punishing, marking the longest multi-week slump for equal‑weight funds since 2022 and delivering a more than 4% drop at one point.
Analyses this year have highlighted how narrow the rally has become. A Goldman Sachs study pointed to market breadth at levels not seen since the late 1990s, and an independent review found that a small basket of AI-focused names generated the lion’s share of the index’s price return since early 2024.
What that means for investors
Underperformance doesn’t mean equal-weight is broken—it means the two strategies behave differently depending on which stocks dominate the market. When a few large caps surge, market cap-weighted funds benefit disproportionately. When the broader market rallies or large caps stumble, equal‑weight tends to fare better.
Several market strategists advise treating the approaches as complements rather than competitors. Todd Rosenbluth of TMX VettaFi counsels blending cap-weighted exposure with equal-weight allocations instead of choosing one exclusively. Todd Sohn at Baird Strategas urges surrounding a core S&P holding with “low‑Tech, low‑correlation” alternatives—assets that move differently from the AI-driven leaders.
- Why diversification matters now: A concentrated rally increases vulnerability to a pullback in a handful of names, which could drag on overall returns even if the headline index remains high.
- Equal‑weight’s tradeoff: It reduces single-stock concentration but may lag during periods when a few mega-cap firms power the market higher.
- Market‑cap funds’ tradeoff: They capture gains when the largest companies surge but expose investors to concentrated downside if those firms correct.
Practical portfolio options
Investors who want to reduce concentration risk have several paths to consider—each with different implications for return, volatility and correlation to the S&P 500:
- Combine a core market-cap S&P ETF with an equal-weight S&P ETF to smooth exposure across market cycles.
- Use sector-level equal-weight ETFs to target and trim overweight technology exposure without abandoning broad market exposure entirely.
- Add mid‑cap or SMID (small‑to‑mid) allocations to access firms outside the mega‑cap cohort; these can offer diversification and different growth dynamics.
- Consider real assets (energy, metals, commodities) as diversifiers against a tech-centered rally.
- Maintain high‑quality, short‑duration fixed income to provide liquidity and reduce portfolio volatility if equity leadership narrows or reverses.
Each option carries tradeoffs. Sector equal‑weighting or mid‑cap exposure can help when large tech stocks slow, but they won’t fully match the upside when those giants sprint ahead. Short-term performance should not be the only benchmark—investors must weigh objectives, time horizon and risk tolerance.
DataTrek’s recent work underscores the shifting performance patterns: equal‑weight outperformed cap‑weighted indexes between 2004 and 2014 but has tended to lag since 2015, with only a few exceptions tied to market regimes that punished large tech. That historical context suggests neither approach is universally superior; the right choice depends on how you view the concentration of profits and earnings power among today’s leading companies.
Bottom line
If you worry the market’s advance rests on too few names, you don’t have to abandon the S&P 500—consider pairing core market‑cap exposure with targeted equal‑weight or mid‑cap holdings and complementary diversifiers. Doing so can reduce single-stock concentration without forfeiting access to the market’s gains, and it gives portfolios more flexibility if leadership rotates away from the AI and mega-cap winners that have dominated recent returns.
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Jordan Keller specializes in analyzing the US financial markets. With concrete recommendations, he helps you secure and boost your investments by providing strategies that adapt to market fluctuations.