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Sound Advice: November 10, 2025

The stock market indexes seem to be dominated by a handful of tech stocks, but how is the average stock doing?

As of late October/early November 2025, the S&P 500 index excluding the Magnificent Seven stocks (the "Other 493") has delivered a modest year-to-date return of approximately 5.3% to 5.4%. That’s barely more than one third of the performance of the full, market-capitalization-weighted S&P 500 index, which was up around 15.1% to 16% over the same period. 

(The Magnificent Seven stocks are Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia, and Tesla.)

Index Concentration and Market Breadth

The S&P 500 Equal Weight Index underperformed the standard, cap-weighted S&P 500 by about 12% in 2024, reflecting the gap between the top performing giants and the rest of the market. Only sectors like utilities, industrials, real estate, and energy outperformed their cap-weighted peers, while tech and consumer-focused sectors were dominated by a few leaders.​

Average Stock Performance

When using an equal weighting (which treats each constituent the same, regardless of size), returns have lagged well behind the cap-weighted indexes. This pattern indicates that the "average" stock is struggling compared to the index's largest, most prominent names. Breadth indicators and market analysis suggest that while indexes reach new highs, the majority of stocks are advancing much less, and some are even declining, signaling underlying weakness beneath the surface.​

Broader Implications

  • Weak market breadth can be an early warning sign that headline index gains are not broadly shared, raising the risk of corrections if leadership falters.​
  • Equal-weight indexes and diversified portfolios have provided some defensive benefits during periods of tech stock pullbacks, but have not kept pace in rallies led by a narrow group of mega-caps.​
  • Investors relying solely on cap-weighted benchmarks may not get an accurate picture of the market's overall health, since a small group of winners can mask broader underperformance.

Small stocks usually outperform, but this year they seem to be lagging. Why is that?

Small-cap stocks have lagged behind large-cap stocks in 2025, despite their historical tendency to outperform over longer periods. This underperformance is largely due to several key factors, including higher borrowing costs, sector exposure, and broader market dynamics.​

Key Reasons for Lagging Performance

  • Higher Borrowing Costs: Small-cap companies are generally less profitable and more dependent on credit. As interest rates have remained elevated, small caps have faced higher borrowing costs, making it harder to fund growth and operations compared to larger, more established firms.​
  • Sector Exposure: The Russell 2000  and other small-cap benchmarks have lighter exposure to the technology sector, which has driven much of the market's gains in 2025. This has left small caps behind as tech-heavy indexes like the Nasdaq Composite surged.
  • Market Breadth and Risk Sentiment: The broader market has favored large-cap, mega-cap, and tech stocks, with a "risk-off" sentiment limiting investment in smaller, less liquid names. Recession fears and economic uncertainty have further dampened investor appetite for small caps.​
  • Structural Shifts: The rise of private markets and the trend for companies to stay private longer or go public at larger sizes have reduced the pool of attractive small-cap opportunities, contributing to underperformance.​
  • Outlook and Potential Reversal Despite the recent lag, some analysts believe small caps may be poised for a rebound. Lower interest rates, improving economic conditions, and historically attractive valuations could provide tailwinds for small-cap stocks in the coming months. For now, however, the combination of sector dynamics, higher financing costs, and risk aversion has kept small caps in the shadows of their larger peers.​

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