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WEEK AHEAD
January 6-10, 2024
Overshadowed by a stellar 2024, equity markets surprisingly took a breather in December, closing the month down 2.38%, temporarily easing technical momentum. However, robust economic fundamentals provided a solid counterbalance, keeping our tactical models steady, balanced, and fully invested for the time being.
If 2024 had a theme, it was reinvention—of technology, energy, and even monetary policy. The S&P 500 surged 25% in a blockbuster year, propelled by AI dominance, economic resilience, and a political wildcard that markets embraced with open arms.
The Unstoppable Engine of Growth
Artificial intelligence wasn't just a buzzword in 2024 but a full-blown economic driver. NVIDIA, already synonymous with AI innovation, became the poster child for exponential growth, riding the wave of insatiable demand for its GPUs. Microsoft and Google sparred for supremacy in integrating AI into every corner of life, from office tools to search engines. Apple, true to form, quietly yet powerfully introduced AI features that had everyone upgrading their devices before they even realized it.
These mega-cap tech titans—NVIDIA, Google, Amazon, Meta, and Apple—did the heavy lifting for the market-cap-weighted S&P 500. Their dominance underscored a broader truth: AI is not just the future; it's the now.
In a year where "clean energy" was more than a talking point, utilities—particularly those tied to nuclear energy—found themselves in the AI spotlight. Utility stocks extended new life as investors sought opportunity amid AI-driven momentum.
The Fed's Pivot and Financial Stocks' Revival
After playing the inflation hawk for much of the prior two years, the Federal Reserve executed a strategic pivot, cutting rates by 1% across three meetings to bring the benchmark rate to 4.5%. Dubbed a "recalibration" by Chair Powell, this shift was a nod to taming inflation and an economy that proved more resilient than anyone anticipated.
Financial stocks, long languishing under the weight of lower rates, roared back to life. Big banks thrived as the yield curve started to steepen, and regional players followed suit, buoyed by an economy growing at a healthy 3.1% annual clip. Even as unemployment ticked up slightly to 4.2%, it was clear the Fed's soft landing wasn't just a theory—it was the headline act.
The Trump Trade and Global Resilience
November's presidential election brought the "Trump Trade" back into the market's vernacular, spurring a post-election rally that added fuel to an already bullish year. Even as global conflicts simmered, the U.S. economy remained unfazed, showcasing its uncanny ability to thrive amid geopolitical uncertainty.
The S&P 500 soared 25% in 2024, powered by AI innovation and a resilient economy, while bonds navigated a volatile year to post a modest 1.25% gain. 2025 is off to a strong start, buoyed by a 2.2% jump in Pending Home Sales, lower-than-expected jobless claims at 211,000, and a rise in ISM New Orders to 52.5. These positive signals helped the S&P 500 gain 1.05% in the first two trading days, setting a positive tone for the year ahead.
"We will give relief to Americans, and we will extend the Trump Tax cuts. We are going to protect our industries from one-sided trade deals and we will bring overseas investments back to America shores… I think we should unite in this idea. It is time to reinstate fear in our enemies, refocus our mission on lethality, and realign our commitment to peace through strength right now."
— House Speak Mike Johnson, Remarks after Re-election to Speaker of the House for the 119th Congress, Jan. 4, 2025.
Survival of the Fittest – S&P 500 Roars Past S&P 500 Equal-Weighted Index
The S&P 500 Index is one of the most well-known benchmarks in the world of investing. It tracks the performance of 500 of the largest publicly traded companies in the United States, weighted by market capitalization. In contrast, the S&P 500 Equal-Weighted Index includes the same 500 companies but assigns each company an equal weighting, regardless of its size. Although they share the same constituents, the weighting methodologies create distinct investment profiles and performance outcomes. This segment explores the pros and cons of each index, their performance in 2024, how their top holdings differ, and how they compare to their composition in 1999.
Methodology and Structure
The S&P 500 Index is weighted by market capitalization, meaning larger companies such as Apple, Microsoft, and Amazon disproportionately impact the index's performance. This structure allows the index to reflect the performance of the U.S. economy's largest and most influential companies. However, it also makes the index more susceptible to the fortunes of a few dominant players, especially now during periods of heightened market concentration.
By contrast, the S&P 500 Equal-Weighted Index assigns an equal 0.2% weight to each of the 500 companies, regardless of their market capitalization. This approach diversifies the impact of individual stocks, giving all companies a chance to contribute meaningfully to the index's performance. Consequently, the equal-weighted index tends to be more aligned with mid-cap companies and sectors beyond the tech-heavy tilt of the market-cap-weighted index.
Performance in 2024
In 2024, the performance of the two indices diverged significantly, driven by the dominance of the "Magnificent Seven" mega-cap technology stocks in the market-cap-weighted index. These companies—including Apple, Microsoft, Nvidia, Amazon, Alphabet, Tesla, and Meta Platforms—continued to benefit from themes like artificial intelligence, cloud computing, and digital advertising. As a result, the market-cap-weighted S&P 500 delivered a robust return of approximately 25% for the year.
On the other hand, the S&P 500 Equal-Weighted Index lagged with a return closer to 13%. This underperformance stemmed from the relative weakness of smaller-cap stocks and sectors such as healthcare and industrials, which struggled amid rising interest rates and economic uncertainty. The equal-weighted index's lack of concentration in mega-cap tech stocks also meant it missed out on the outsized gains of the largest players.
Differences in Top Holdings
The top 10 holdings of the S&P 500 Index are dominated by the largest companies in the U.S. economy. As of the end of 2024, the top 10 holdings accounted for more than 30% of the index's total weight—including:
This concentration reflects the dominance of mega-cap stocks and their influence on the broader market. When one of these stocks experiences a sharp rise or decline, the overall index is significantly affected. For example, a 10% drop in Apple's stock price could reduce the index's return by approximately 0.72 percentage points, underscoring the outsized impact of its largest constituents. In 2024, the S&P 500 Top 10 returned over 40%.
In contrast, the S&P 500 Equal-Weighted Index assigns the same weight to each of its 500 constituents, resulting in a more diversified portfolio. The top 10 holdings in the equal-weighted index typically represent only about 2% of the total index weight combined, as each stock carries an equal 0.2% weight. This structure reduces the impact of any single company's performance. For example, a 10% drop in any one stock would reduce the equal-weighted index's return by just 0.02 percentage points, making it less sensitive to the performance of individual companies. However, the equal-weighted approach also means that large gains in mega-cap stocks have less influence on the overall index performance, potentially limiting returns during periods of strong performance by market leaders.
Pros and Cons of Each Index
S&P 500 Index (Market-Cap Weighted)
S&P 500 Equal-Weighted Index
Investment Implications
The choice between the S&P 500 Index and the S&P 500 Equal-Weighted Index depends on an investor's objectives and market outlook. The market-cap-weighted index is suitable for those seeking exposure to the largest and most liquid companies, while the equal-weighted index may appeal to investors looking for diversification and reduced concentration risk.
In 2024, the divergence in performance highlighted the importance of considering market conditions when comparing the two indices. During years dominated by mega-cap growth, the market-cap-weighted index outperforms. Conversely, the equal-weighted index may shine during periods of broader market participation and strength in smaller-cap or value stocks.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.