Inside Markets — Equal Weight S&P 500

The S&P 500 (SPX) gained >20% in 2024 for a second consecutive year with the best Sharpe ratio in more than 30 years. A third year of >20% returns is unlikely, especially when you consider the record level of concentration within Mag 7 stocks accounting for ~32% of the SPX and ~44% of the Nasdaq 100 (NDX). As a group, Mag 7 stocks are up only +2% YTD in 2025, while the remaining 492 stocks in the S&P 500 are up +5%. We mentioned this before, but it’s important enough to repeat: The fundamental driver behind these returns is the relative earnings growth rate differential between Mag 7 and the remaining 493 stocks.  If you trust consensus estimates, the earnings growth rate differential is expected to narrow from 30 percentage points in 2024 to just 6 percentage points in 2025. This would be the most narrow earnings spread in seven years (if realized).

Earnings growth for aggregate Mag 7 stocks is expected to be 18%, down from 33% last year, while earnings growth for the other 493 is expected to rise to 12% from 3% last year. While +18% earnings growth is higher than our +11% expectation for the SPX as a while, that +18% number is already priced in, while the expected 12% earnings growth for the other 493 is not. Consensus estimates could be wrong, but six of the Mag 7 companies have already announced Q4 results with 12-month forward estimates for the group remaining unchanged, which is rare.