What equal weighted indices can tell us about markets

After several years where a small handful of giant US tech companies have dominated stock market returns, 2026 is shaping up to be a different story.

This year, market breadth is emerging as a theme – meaning more companies and more sectors are contributing to market gains, rather than just the usual big names.

One sign of this shift is the performance of the S&P 500 Equal Weighted Index, which has outperformed the traditional S&P 500 Index so far this year. But it’s important to note that this is a very short time frame to measure, and past performance isn’t a guide to future returns.

This article isn’t personal advice. Remember, investments rise and fall in value, so you could get back less than you invest. If you’re not sure if an investment’s right for you, ask for financial advice.

Market cap versus equal weight – what’s the difference?

In a market‑cap‑weighted index, like the S&P 500, each company’s size determines its weight in the index. The larger a company is, the more it impacts the index’s overall performance, whereas smaller companies have much less impact.

Take the S&P 500 as an example. Right now, Nvidia is the largest company in the index, making up around 7%. So, its share price movements have a much bigger impact on the performance of the index than those of smaller companies.

An equal weighted index works differently. Every company gets the same weighting when the index is rebalanced, regardless of size. That means the index’s performance reflects how the average company is performing, rather than being driven by whoever is biggest.

Will equal weight lead the way in 2026

In recent years, the S&P 500 has performed better than its equal weighted counterpart because it has greater exposure to the big tech names that have powered the Artificial Intelligence (AI) boom.

Companies in the Information Technology and Communication sectors make up around 44% of the S&P 500 compared to 17% in the equal weighted index.

In 2025, the so-called ‘Magnificent 7’ companies – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – were responsible for nearly half of the S&P 500’s total return.

This level of outperformance has been more extreme than in previous years. Between 2023 and 2025 the S&P 500 beat the equal weighted index by the largest amount over any three-year period since the equal weighted index was first valued in 1989.

But 2026 has seen that trend start to reverse.

Year to date (to the end of February), the equal weighted index has outperformed the S&P 500 by around 6% – the biggest difference at this point of the year since 1992.

The Vanguard S&P 500 ETF has returned 0.69%*, compared to the iShares S&P 500 Equal Weight ETF which has risen 7.06% to the end of February. These ETFs have been used to demonstrate the performance of the respective indices.

Sectors like industrials, consumer staples and energy have performed well this year and the equal weighted index has more exposure to these areas than the S&P 500.

Why this shift matters

When so few companies drive most of the market’s returns, diversification – an important investment strategy to manage risk and smooth returns – becomes harder to achieve.

Recent concentration levels have been extreme. Even a broad US index tracker can become heavily dependent on a handful of very large companies or overly exposed to a specific sector.

This is something that investors should be aware of when thinking about diversification in their portfolios. For context, the top 10 companies in the S&P 500 reached 42% in 2025 – the highest level in nearly a century.

Signs of the market broadening

Equal‑weighted ETFs have become increasingly popular this year, as investors rotate away from mega‑caps, particularly those linked closely to AI.

Small and medium‑sized US companies have outperformed large ones so far this year. Value investing is also ahead of growth investing in the US – another reversal of what we saw in 2025.

And this isn’t just in the US. Globally, the MSCI World Equal Weighted Index has outperformed the traditional MSCI World Index by nearly 5% so far this year.

What does this mean for investors?

There are early signs that markets are broadening out, which is generally a healthy development. But as we’ve seen more recently, markets can shift quickly. So that’s not to say that this trend will continue, or that large US tech companies won’t perform well again this year.

Instead, it’s a helpful reminder of why long‑term investors should aim to diversify their portfolios not just across regions, but also across sectors, company sizes and investment styles.

A well‑balanced portfolio can help reduce reliance on any single group of companies and help capture potential investment opportunities in other parts of the market.