It wasn’t that long ago that the “Magnificent 7” stocks, Apple Inc. (NASDAQ: AAPL), Microsoft Corp. (NASDAQ: MSFT), Nvidia Corp. (NASDAQ: NVDA), Tesla Inc. (NASDAQ: TSLA), Amazon.com Inc.  (NASDAQ: AMZN), Alphabet Inc. (NASDAQ: GOOGL) and Meta Platforms Inc. (NASDAQ: META) were pretty much the only game in town. 

Since late May, other stocks have been rotating into leadership.

As of July 31, the top S&P 500 performers and their year-to-date returns were:

• Nvidia: 219.90%
• Meta Platforms: 170.47%
• Carnival Corp. (NYSE: CCL): 129.40%
• Royal Caribbean Cruises Ltd. (NYSE: RCL): 119.64%
• Tesla: 116.30%
• PulteGroup Inc. (NYSE: PHM): 86.29%
• Align Technology Inc. (NASDAQ: ALGN): 81.08%
• Palo Alto Networks Inc. (NASDAQ: PANW): 78.04%
• Norwegian Cruise Line Holdings Ltd. (NYSE: NCLH): 75.98%
• General Electric Co. (NYSE: GE): 74.95%

That’s quite a different list from the one you would have seen a couple of months ago. In particular, as cruise lines sail to higher prices, the makeup of S&P top performers is changing. 

Equal-Weighted S&P As Gauge Of Breadth

One informative way to slice and dice the performance of S&P internals is by comparing the performance of the equal-weighted index with the traditional market-cap weighted.

As its name implies, the S&P 500 equal-weighted index assigns an equal weighting to each constituent, providing a balanced representation of all included stocks. That means no component, regardless of its market capitalization, has outsized influence over index performance. 

This approach tends to tilt the index toward the smaller holdings, which are frequently more volatile than the mega-caps that dominate the market-cap-weighted index. That volatility isn’t necessarily a bad thing, as it can, at times, lead to outperformance. 

You can track the S&P equal-weighted index with the Invesco S&P 500 Equal Weight ETF (NYSEARCA: RSP). 

While the equal-weighted index can provide a more diversified representation of components, giving smaller companies an equal sway as larger ones and potentially reducing concentration risk, the traditional market-cap weighted index is still outperforming by a wide margin.

Not Unusual To See Performance Divergence

So far this year, the market-cap-weighted S&P 500 is outpacing the equal-weighted index by 97%. It’s not necessarily unusual to see that disparity at this juncture; there’s generally a cyclical nature to the indexes’ returns, as the market-cap weighted tends to outperform as the market is rebounding, as is happening this year. 

Still, the performance of the equal-weight index offers one more data point to support the case that breadth is returning to markets.

A look at the Invesco S&P 500 Equal Weight ETF’s chart shows the fund is within a whisker of clearing a base that began in early February. 

So what does the performance of equal-weighted S&P leaders mean for market breadth? 

How Smaller Companies Contribute To Index Return

The equal-weighted index shows how smaller companies are contributing to the overall market; as their performance improves, as we’re clearly seeing with the cruise lines, they frequently bring other industry peers along with them. To use a cliche that’s appropriate in this case: A rising tide can lift all - or at least other - boats.

Stock market breadth is considered bullish when many stocks across various sectors and market capitalizations participate in an uptrend. 

A broad-based rally indicates a healthy market as more companies see positive price movements, reflecting overall investor optimism. 

Greater Breadth Suggests Greater Confidence

A high degree of market breadth suggests broad confidence and positive sentiment, often indicating a robust and more sustainable rally. It also signifies that multiple industries and companies are contributing to the market's strength, making it less reliant on the performance of a few heavily-weighted stocks or sectors. 

It’s that latter point that has made investors nervous all year, even as AI, cloud computing and electric vehicles sent some stocks on rocket rides. 

While it’s certainly possible the market will see a pullback before year’s end, it’s statistically unlikely that 2023 will be a down year in the market. Historically, down years are most often followed by a year with S&P 500 price gains. 

Increased breadth only makes that likelihood stronger, as it’s not up to just big techs to carry the entire market on their backs.