The stock market has been all about the biggest companies driving the largest gains for the better part of the last decade.
That era could be coming to an end.
“History would suggest there is more to go in cap-weighted dominance,” Bank of America’s head of US equity and quantative strategy Savita Subramanian wrote in a note to clients.
“But if the Fed’s next move is a rate cut, and if the Regime indicator is shifting to a Recovery, we think the run may be closer to done.”
Work from Subramanian’s team found that the largest 50 stocks in the S&P 500 (^GSPC) have outperformed the benchmark index by 73 percentage points since 2015. BofA notes the last notable run of similar outperformance for the 50 largest stocks in the index came in the late 1990s leading into the bursting of the dot-com bubble.
Following the bust, the market saw a large shift from megacap growth leading to value and small-cap stocks outperforming during the early 2000s.
Subramanian thinks a similar tide shift might be coming to markets now.
BofA’s “regime indicator” breaks market cycles into four parts: Recovery, Mid Cycle, Late Cycle, and Downturn.
The firm looks at a variety of factors such as corporate earnings revisions, inflation data, and economic growth projections. Currently, its work suggests markets moving from the Downturn phase — which is positive for megacaps with the most earnings power and strongest market position — to the Recovery phase.
“[Federal Reserve] easing has been accompanied by Mega caps lagging more than leading, and higher inflation should support a broadening of the S&P 500 beyond defensives/secular growth,” Subramanian wrote.
Subramanian’s call would mark a massive shift in the dominant market narrative.
Since the start of the current bull market in October 2022, large-cap technology has been the clear winner in the stock market as the artificial intelligence boom has taken hold. For much of both 2023 and 2024, a small group of technology stocks, once dubbed the “Magnificent Seven,” have been pulling the stock market higher.
This had also been the case since the most recent market bottom in April.
In a note to clients on Aug. 13, DataTrek Research co-founder Jessica Rabe highlighted how the top 20 stocks by market cap in the index have risen an average of 40.6% since the bottom, far outpacing the benchmark index’s 27.9% gain over the same time period.
This means the top 20 holdings have helped pull the index higher, while the other 480 stocks have been “a net drag” on the index in relative terms, Rabe wrote.
