The S&P 500 index outperformed its equal-weighted counterpart by more than 10% in the first half of 2024, something that has happened only once before.
THE S&P500 (^GSPC -0.41%) surpassed the S&P 500 Equal Weight Index The index fell more than 10% during the first half of the year, a phenomenon that has only happened once before. These are a handful of companies specializing in artificial intelligence (AI). The companies in question have become so large that they significantly influence the performance of the index.
Specifically, Nvidia It alone has contributed 30% to the S&P 500’s gains since the beginning of the year. In addition, Microsoft, AmazonAnd Alphabet collectively contributed 26% of the gains, and Apple And Metaplatforms collectively contributed 11% of the gains. In short, six companies contributed two-thirds of the S&P 500’s rise through June.
Some analysts have described this phenomenon as a stock market bubble and expressed concern that the growing influence of a few AI companies could lead to a dot-com crash. But history shows that the S&P 500’s growing concentration could be a good thing.
Historically, when the S&P 500 outperformed its equal-weighted peer in the first half of the year, the index typically generated stellar returns over the next 12 months. Here’s what investors need to know.
History Says S&P 500 Could Return 18% by June 2025
The S&P 500 index tracks 500 large U.S. companies. The index is weighted by market capitalization, meaning that larger companies have a greater impact on its performance. The S&P 500 Equal Weight Index (EWI) tracks the same 500 companies, but its equally weighted components impact performance to the same extent. The EWI S&P 500 was created in 2003, but backtested values date back to 1971.
Since then, the S&P 500 has outperformed its equal-weighted counterpart 16 times in the first half of the year. Even rarer, the S&P 500 has outperformed by more than 10% twice. This happened most recently in the first half of 2024, when the S&P 500 returned 14.5% and the S&P 500 EWI returned 4.1%. But that incident is hardly comparable to the previous one in 1973.
To elaborate, the S&P 500 and S&P 500 EWI fell sharply during the first half of 1973. The S&P 500 simply fell less sharply, so it outperformed by 10.7%. This differs from the current situation because both indices rose in 2024. Investors should therefore not compare these two events in isolation.
It makes more sense to look at each year in which the S&P 500 outperformed the S&P 500 EWI in the first half of the year. The graphic below helps achieve this. It shows the extent of the S&P 500’s outperformance during the first half of the year and the S&P 500’s performance over the following 12 months.
|
Year |
Outperformance of the S&P 500 in the first half |
12-month return of the S&P 500 |
|---|---|---|
|
1972 |
2.7% |
(2.7%) |
|
1973 |
10.7% |
(17.5%) |
|
1984 |
2.1% |
25.4% |
|
1990 |
2.5% |
3.7% |
|
1995 |
1.2% |
23.1% |
|
1996 |
0.5% |
32% |
|
1997 |
4% |
28.1% |
|
1998 |
6.2% |
21.1% |
|
2000 |
0.5% |
(15.8%) |
|
2012 |
1.3% |
17.9% |
|
2015 |
0.5% |
1.7% |
|
2017 |
1.2% |
12.2% |
|
2018 |
0.9% |
8.2% |
|
2020 |
7.7% |
38.6% |
|
2023 |
9.9% |
22.7% |
|
Median |
17.9% |
Data source: YCharts.
As the chart shows, when the S&P 500 outperformed its equal-weighted counterpart in the first half of a year, it posted a median return of 17.9% over the following 12 months. Past performance is never a guarantee of future results, but history suggests the S&P 500 will be up significantly—nearly 18%—through June 2025.
Artificial Intelligence Stocks Are Not in a Dotcom Bubble
Some analysts have described the recent surge in artificial intelligence stocks, including chipmaker Nvidia, as a “stock market bubble.” Some have even compared the current market environment to the dot-com bubble, an event that ultimately shattered the technology sector.
Neil Shearing of Capital Economics recently said: “The enthusiasm around AI has all the hallmarks of a bubble inflating. Colleagues Diana Iovanel and James Reilly added: “We believe the bubble will eventually burst beyond the end of next year, causing a correction in valuations.” After all, this dynamic has already occurred in both the dot-com bubble of the late 1990s and early 2000s and the Great Crash of 1929.”
Investors should avoid thinking along these lines. The current environment – that is, the AI euphoria that has arisen since the launch of ChatGPT – bears only a superficial resemblance to the dot-com bubble. There are two important distinctions.
First, the heavy technology Nasdaq-100 jumped 270% in the 18 months to March 2000. At that time, the index reversed course and plunged 80% in about two years. This differs drastically from the recent AI-powered rally. The Nasdaq-100 is only up 80% over the past 18 months.
Second, according to Capital Group, the seven largest stocks in the Nasdaq-100 were trading on average at a valuation of 80 times earnings in March 2000. Again, the situation is very different from today. The seven largest stocks on the Nasdaq-100 currently trade at an average valuation of 46 times earnings.
I’m not saying that all AI stocks are fairly valued, or that the excitement over AI will drive the stock market higher indefinitely. Technology often follows the Gartner Hype Cycle, which states that (1) irrational excitement first drives stocks too high, (2) irrational pessimism then drives stocks too low, and (3) reasonable expectations eventually put stocks on a gradual upward trajectory.
Bottom line: History tells us that the S&P 500 will rise 18% over the next year, but there’s no guarantee that will happen. Wall Street could be disappointed by AI stocks tomorrow and the S&P 500 could fall sharply if other concerns, such as valuations or the economy, take over.
But no matter which way the winds blow in the coming months, I don’t believe the current market environment is comparable to that of the dot-com bubble. And AI is not an overhyped phenomenon destined to disappoint. On the contrary, it will create considerable wealth for patient investors. To quote UBS According to analysts, “AI will be the most profound innovation and one of the greatest investment opportunities in human history.”
Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions at Amazon and Nvidia. The Motley Fool has positions and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft and Nvidia. The Motley Fool recommends Gartner and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.