Skip to main content

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.​

Comments

Post a Comment

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...
Post a Comment
Read more

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...
Post a Comment
Read more

Sound Advice: July 16, 2025

Fixed annuities are poor investments Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns:   High Fees and Commissions Internal Fees:  Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time. Commissions:  Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client. Comparison to Other Investments:  Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth. Limited Growth a...
Post a Comment
Read more