The Big Picture
Briefing.com Summary:
*After years of being largely overlooked, the market outside the mega-cap stocks offers a rebalancing opportunity.
*Mega-cap stocks still have their appeal, but tough comparisons, fierce competition, and the law of large numbers are working against them.
*The concentration risk in mega-cap stocks highlights the importance of spreading investments across the broader market.
It is the age-old social dynamic. Some people are in the "in crowd" and others are not. The in crowd are the populars, or so it is perceived; they are the crowd many on the outside looking in think they want to be a part of, only to recognize once they are in that maybe that's not where they really belong or truly want to be.
If we want to connect these social dots to the stock market, we would say that the mega-cap stocks are undeniably the "in crowd," which is to say many investors—retail and institutional alike—are part of the in crowd.
But is that where they belong? Yes, to a certain degree, but let's just say that they might want to rethink how strong an affiliation they want to keep with the in crowd.
The mega-cap stocks have gotten so popular that, well, one could say they have gotten so full of themselves that it can be tough to be around them—or, at least, not as easy as it used to be.
So, where do investors belong? Taylor Swift has the answer.
Clear to See
Are you tired of hearing about the "Magnificent 7" or hearing the term "mega-cap" in general? They seem to be all anyone (including us) can talk about, but can you blame them (or us)? They have had a phenomenal run over the past three years and have been the standard bearer for "the market" that is commonly known as the S&P 500.
That is clear to see in the chart below. Also clear to see is that the S&P 500, viewed through an equal-weighted lens, has been on the outside looking in and has not been amongst the populars. Sure, the rest of the market has had some fun, but it has not been invited to the popular kids' party.
One of the refrains in Taylor Swift's song "You Belong With Me" nails it in terms of how investors have been so taken by the mega-cap stocks, all but ignoring other compatible investment opportunities right in front of them.
"But she wears short skirts (mega-cap stocks), I wear T-shirts (rest of the market)
She's Cheer Captain (mega-cap stocks), and I'm on the bleachers (rest of the market)
Dreaming about the day when you (investors) wake up and find
That what you're looking for has been here the whole time
If you could see that I'm the one who understands you
Been here all along, so why can't you see?
You belong with me, you belong with me"
More recently, investors have found their way back to the rest of the market. Why? The populars have lost some of their popularity for a variety of reasons.
- Concentration risk: The 10 largest S&P 500 stocks comprise roughly 40% of the S&P 500 market capitalization versus ~27% in 2000
- General profit-taking after a huge run (many investors have the ability to sell now at the lower long-term capital gains tax rate)
- Worries about overspending in pursuit of AI growth opportunities
- Investors have grown more confident in the prospect of the economy remaining on a growth trajectory and interest rates remaining relatively low
It was telling this past week that, on a day when Oracle (ORCL) dropped as much as 16% following an earnings report that featured a revenue miss, the S&P 500 and Dow Jones Industrial Average established record closing highs. The Russell 2000 gained 1.2%, also on its way to a new record closing high.
Meanwhile, the equal-weighted S&P 500 gained 0.8% compared to a 0.2% gain for the market cap-weighted S&P 500. The Russell 3000 Value Index jumped 0.7%, while the Russell 3000 Growth Index finished flat.
Investors had a new sense of belonging, so to speak, and it wasn't with the populars. It was with many of the stocks that have been sitting in the bleachers for several years, biding their time to be recognized for the faithful investment companions they have always been.
Briefing.com Analyst Insight
The mega-cap stocks will still be popular. They are on the cutting edge of the AI growth opportunity, but the market knows that, and their stocks have the price appreciation to show for it. What they don't have yet necessarily are the profits that have been baked into their stock prices. That doesn't mean they won't eventually, only that their popularity has mostly afforded them the benefit of the doubt to this point.
The mega-cap stocks have done so well, though, that they are transitioning to the prove-it phase, with the law of large numbers, fierce competition, and tough comparisons nipping at their heels.
The rest of the market doesn't have the same challenges, but it has the same opportunity to capitalize on an economy that is projected to remain on a growth trajectory, benefiting from a tailwind of tax refunds and presumably low(er) interest rates.
The economy, of course, hasn't crossed the proving ground in 2026, but easier comparisons, the over-concentration in mega-cap stocks, and palatable valuations for the rest of the market have created a rebalancing opportunity that investors haven't fully embraced. And Taylor Swift sings at the end of her song:
"Standing by and waiting at your backdoor
All this time how could you not know, baby?
You belong with me
You belong with me
Have you ever thought, just maybe
You belong with me?
You belong with me"
Mega-cap stocks still belong in your investment portfolio, but it's time for investors to start looking into the bleachers at the rest of the market.
--Patrick J. O'Hare, Briefing.com
