- S&P 500 index no higher than in August 2025
- US 10-year bond price is at lowest level (and thus the yield is at its highest level) since last summer, too
- Equal-weighted S&P 500 index is outperforming the actual, market-cap weighted version of the US equity benchmark
“Sun Tzu wrote that, ‘No country has ever benefited from a protracted war,’ and from their narrow and selfish perspective, America’s financial markets may be inclined to agree, as the S&P 500 equity index is retreating to its lowest level and the benchmark 10-year Treasury yield is rising to its highest mark since last summer,” says AJ Bell investment director Russ Mould.
“The US still represents some 60% of global stock market capitalisation and is home to the world’s biggest bond market, so this stumble may have wider implications, as investors are once more obliged to ponder the concept of American exceptionalism and what it means for asset valuations.
“Even before the start of the war in the Middle East, investors were assessing the impact of President Trump’s tariffs, challenges to the independence of the US Federal Reserve and whether private credit represented a growing risk to America’s growth and financial prospects. All of these factors left the S&P 500 paddling sideways after its initial recovery from last April’s so-called Liberation Day, as did the debate over whether the boom in spending on artificial intelligence and the hyperscalers’ share prices was sustainable or not.
Source: LSEG Refinitiv data
“AI-related stocks are underperforming this year, although whether this is due to concern over their investment plans, the possible returns on their spending or merely the impact of higher bond yields upon discounted cashflow (DCF) models and theoretical equity valuations is hard to divine.
“Either way, the US equity market remains heavily reliant upon them.
“The so-called Magnificent Seven US technology companies – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla – are all among the 10 most highly valued public companies in the world. Between them, they represent 34% of the S&P 500’s total value and, by extension, 21% of the FTSE All-World index.
Source: LSEG Refinitiv data
“There have been similar periods in the past when one sector, or a select grouping of stocks, drove US and global equities to new highs. These include the ‘onics and ‘tronics (technology) names of the late 1960s, the Nifty Fifty in the early 1970s and then the technology, media and telecoms (TMT) sectors in the late 1990s. All were very profitable for investors on the way up and providers of equal amounts of pain on the way down.
“Narrow markets are prone to toppling over, as valuations prove stretched, earnings forecasts unattainable, and sellers start to overwhelm would-be buyers, especially when those getting out first are those on the inside, in the form of early-stage finance providers, such as venture capitalists, or management and staff.
“A rush of new stock market listings and subsequent secondary offerings would therefore be a concern.
“Warren Buffett’s mentor, Benjamin Graham was similarly wary of buyers flocking to shiny, expensive market newcomers just as the smart money crept toward the exit, arguing in his 1934 tome Security Analysis that ‘One of the most devastatingly accurate of these economic rules is this: anytime the term ‘New Era’ becomes widely accepted, get the hell out of the stock market.’
“We have yet to see a rush of new initial public offerings, but SpaceX may be on the launch pad and any investor who wishes to keep exposure to the American economic engine and its entrepreneurial, go-getting culture, while managing the risk posed by technology valuations and a top-heavy stock market does have the option of seeking exposure to a version of the S&P 500 that is equal weighted across all of its members, rather than market-cap weighted.
Source: LSEG Refinitiv data
“The equal-weighted version of the benchmark has actually outperformed the actual S&P 500 since 1990, in both capital and total return terms.
“The difference in the compound annual returns may look modest – 8.9% a year versus 8.4% in capital returns, and 11.1% a year versus 10.6% for total returns – but over 36-and-a-bit years that adds up to 359 and 661 extra percentage points of performance.
“The S&P 500 massively outperformed during the TMT bubble of the late 1990s, but the equal-weighted version helped investors to weather the bust and capitalise more fully upon the recovery.
Source: LSEG Refinitiv data
“Investors may therefore be intrigued by how the equal-weighted index is outperforming the market-cap weighted version since it is flat in the year to date, but it compares to a 5.4% drop in the official S&P 500. That comes after the latest multi-year run of outperformance by the market-cap weighted benchmark.”
