The S&P 500 index is one of the most important stock market indexes in the world, composed of the 500 largest companies in the U.S. These companies are selected on the basis of their market capitalization, i.e., the larger they are, the more influence they have.

The strategy Equal Weightis an investment strategy that assigns equal weight to each of the stocks that make up an index.This is done regardless of the size or market capitalization of each company.So why does it make sense under current U.S. market conditions?

In recent years, the U.S. market has been dominated by a select group of technology giants, known as the "Magnificent 7.Magnificent 7"(Mag 7). These companies have been the main drivers of the S&P 500, accounting for about one-third of its total capitalization and explaining about 54% of the index's performance in 2024.

However, this concentration has also brought with it significant risks.. As the Mag 7s have grown in value, the market has become dependent on their performance, increasing the possibility of overvaluation and price correction. This dependence creates vulnerability to any change in the outlook.

At the moment, what we have is an incipient market rotation from growth sectors (technology) to value sectors (technology). valuesectors, which will undoubtedly contribute to making the rally more sustainable. rally the North American market. This shift is due to the slowdown in the earnings growth of the large technology companies, while the rest of the S&P 500 begins to show signs of strengthening.

In this situation, one way to mitigate these risks and take advantage of the recovery of the lagging sectors is to take an exposure to the U.S. market through an instrument that weights companies by equal capitalization: Equal Weight vs. the general market weighted by market capitalization.

However, we propose to shift exposure to the U.S. from a strategy weighted by Market Cap to an Equal Weight. Currently, the S&P 500 trades at ~22x P/U 12m fwd, while the S&P 500 Equal Weighted (SPW) trades at ~17x, representing a discount of ~22%.

This strategy, in addition to reducing the value of the U.S. exposure in the event of a market reversal, would limit the drawdown of the U.S. exposure in the event of a market reversal. drawdown potential drawdown significantly.

Advantages of a tactical shift from SPY to RSP (ETF):

• High concentration in the "Magnificent 7".

The 7 largest companies account for more than 30% of the S&P 500, a level of concentration not seen since the dotcom bubble of 2000. The rotation in market leadership suggests a greater breadth of returns in the future. In 2023 and 2024, less than 30% of stocks in the index outperformed, which is significantly below the historical median of 48%, so this backdrop favors an equal-weighted strategy.

• Deceleration in the growth of the "Mag 7" vs Acceleration of the rest of the S&P 500

In 4Q24, the "Mag 7" grew earnings by 23%, but the rest of the S&P 500 showed significant acceleration after two years of lagging.

For the coming quarters, EPS growth expectations for the rest of the index have improved, while the big techs show a slowdown.

• Current conditions favor a rotation to RSP

In the past, when market leadership has widened and valuations have reached extremes, the S&P 500 Equal Weighted has outperformed the traditional S&P 500. Past cases include the post-2000 recovery and the 2021-2022 market cycle, when returns of equal-cap stocks in the S&P 500 strengthened.

• Relative valuations and potential for improved risk-adjusted returns

RSP has a lower level of concentration and more sector diversification, which reduces dependence on a single market segment. In addition, its valuations, relative to the S&P 500, are at historically attractive levels (~22% discount), suggesting greater appreciation potential in the medium term.

Tomas Haase

Investment Analyst Finance and Business Finance Brokerage Brokerage Firm