Equal Weight's Moment: Setting Up for Year-End Outperformance

We’ve seen this movie before—twice, in fact. When the rolling 8-day performance difference between the S&P 500 Equal Weight Index and the market cap-weighted S&P 500 crosses above 10, it often signals something big: outperformance by the equal weight index. And right on cue, we saw this same signal flash again in late July.

Let’s look at history. We have highlighted in both 2020 and 2022, during the August to December period, a steady outperformance by the equal weight S&P, as broader participation in the market—particularly from mid-caps and smaller names—carried the day. This year, we’re seeing that signal cross above 10 again, and it’s coming at a time when the chart is flirting with breaking a major downtrend line that’s been in place for months.

What makes this year’s setup even more compelling is that we’re coming off a deeply oversold period for equal weight. The underperformance has been relentless, but just as we’ve seen before, the tides can turn quickly—and when they do, it can be powerful.

If this pattern holds up, we’re likely to see the equal weight S&P 500 deliver a strong rally into the final stretch of the year. With the rolling performance indicator having crossed above 10 again, the conditions are ripe for another period of outperformance. All eyes should be on that downtrend line as well—once it breaks, the path to equal weight’s resurgence could open wide.

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The setup is intriguing. The last two times we’ve been in this exact scenario, the equal weight index rallied into year-end, outperforming its market cap-weighted counterpart. The reason behind this makes sense. In these periods, the market starts rotating away from just a handful of megacap tech names and back into more cyclical and diversified sectors. This broader participation often drives equal weight outperformance as it reflects gains more evenly across the index.

Adding further weight to the argument is the breakout we’re seeing in the NYSE Advance-Decline Line. It just hit new all-time highs. What does this mean? It signals that not just a few stocks are lifting the market but that participation is broadening across the board. Small and mid-cap names are starting to rally, suggesting the strength of this market isn't narrowly concentrated in megacaps but rather expanding into a wider base of stocks. This reinforces the idea that equal weight indices—more reflective of this broader participation—could have a strong tailwind into the year’s end.

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