Market Insights and Future Expectations
Last December, it was suggested that keeping a higher allocation towards the Information Technology and Communication Services sectors in the S&P 500 might not be as sensible anymore. Around that time, these sectors held 46.7% of the S&P 500’s market cap, while the U.S. made up 65% of the global MSCI portfolio. This signals a potential need for rebalancing.
Fast forward to mid-December: there were thoughts about how the S&P 500’s so-called “Magnificent 7” could face increasing competition as we head into 2026. This could diminish their stronghold in areas like search (Google), software (Microsoft), retail (Amazon), advertising (Meta), electric vehicles (Tesla), smartphones (Apple), and GPUs (Nvidia). As competition grows, the overall S&P might benefit. So far, things seem to be on the right track, with leadership expanding beyond last year’s top performers.
One point to consider is the high return margin for the S&P 500. Currently, 82.8% of companies show positive three-month changes in forward earnings, which is quite supportive of a bullish trend in stocks.
Another aspect is the expansion of the bull market. The ratio between the S&P 100 and the S&P 500 appears to have peaked late last year, and this peak was significantly lower than during the tech bubble in 1999. This might suggest that a bubble burst is less likely now, given the current market dynamics.
Similarly, the ratio comparing market-weighted and equal-weighted S&P 500 indices indicates a potential decline, which we think could be indicative of an expanding bull market as we move further into 2026.
Interestingly, the equally weighted S&P 500 has hit a new high, although its market cap-weighted cousin hasn’t yet returned to its historical peak.
As we assess the Information Technology and Communication Services sectors, they have reached a record 46.7% of the S&P 500’s market cap. There’s some uncertainty about whether they can maintain this share, especially with AI developments and margin pressures in play, likely leading to more average market performance.
Our analysis likens the current scenario to “Game of Thrones” dynamics. Previously, the Magnificent 7 operated independently, secured by monopolies. Now, the competition fueled by advancements in AI is significantly altering the landscape, potentially reshaping their fates.
On a brighter side, small- and mid-cap stocks have outperformed large-cap ones this year, although there’s this lingering concern that it might be another temporary trend. Yet, they still tend to be cheaper on a forward P/E basis.
Additionally, these smaller companies’ earnings per share, which had stagnated recently, are finally starting to pick up, which is encouraging news. Year to date, indexes like the S&P 600 SmallCap and S&P 400 MidCap have been outperforming the large-cap S&P 500.
Lastly, it feels like the U.S. may have reached a certain peak in its market capitalization share within the global MSCI context. While the U.S. will continue to be exceptional in many respects, emerging markets are clearly on the rise, striving for greater prosperity. Interestingly, yes, the U.S. MSCI stock index is lagging behind various other global counterparts so far in 2026.
