Key Points

  • In the U.S., the biggest market-cap stocks have outperformed the average stock by a wide margin this year.
  • The outperformance by the biggest U.S. stocks is hiding a change in leadership by the average stock: the average international stock has been outperforming the average U.S. stock.
  • The recent imbalances in the stock market can lead to vulnerability; more to the point rebalancing portfolios may be valuable to help balance exposure to U.S. capitalization-weighted benchmarks relative to international stocks.

Capitalization-weighted and equal-weighted stock market indexes typically don't usually drift too far apart. It’s rare that the performance of the biggest stocks pull the capitalization-weighted benchmark away from the average stock in the index, represented by the equal-weighted benchmark—and when they do diverge, it can mask underlying trend shifts. And so it is worth watching when it happens, as it is now.

Inequality in the stock market

In recent years, the performance of the biggest stocks has moved in lockstep with the average stock. That is still the case this year outside the United States. But, in the U.S., the biggest stocks have outperformed the average stock by a wide margin this year, as you can see in the chart below that measures the performance of the cap-weighted index relative to the equal-weighted index for the U.S. and non-U.S. stock markets.

Biggest stocks are outperforming the average stock in the U.S. this year


Source: Charles Schwab, Bloomberg data as of 8/28/2020. Past performance is no guarantee of future results.