Beneath the Surface, the US Market Is Changing—From Concentration to Participation

by Francis Gannon of Royce Investment Partners, 5/14/26

Markets seldom announce their turning points in a clear or obvious way. More often, they show up in subtle—and sometimes contradictory—ways.

One of the clearest recent examples could be seen at the end of March—the S&P 500 Index declined by -4.3% in 1Q26, while the average stock—as measured by the equal-weighted S&P 500—meaningfully outperformed. (Index returns are generally calculated on a capitalization-weighted basis.) This curious combination has only occurred a handful of times over the last five decades, including notable bear markets in the mid-1970s and early 2000s. A recent analysis by Furey Research Partners shows that, when this does happen, it tends to signal an inflection point in which weakness is concentrated at the top while the broader market begins to stabilize—or even strengthen.

Quarters in Which the S&P 500 Index Fell 4%+ and the S&P 500 Equal Weighted Index Outperformed by 4%+ (Since 1971)

For much of the last several years, returns have been driven by a narrow group of mega-cap companies. This kind of concentration typically pushes headline indexes higher (as has been the case over much of the last decade) while also sometimes obscuring what’s happening underneath. The initial stages of a shift toward broader participation are often marked by faltering leadership at the top coinciding with the average stock holding up better—which is precisely the dynamic we’ve been seeing.

It’s worth noting that these transitions are seldom smooth. As leadership changes hands, volatility often spikes as capital rotates across sectors, styles, and market capitalizations. While that can spur uncertainty at the index level, it also tends to foster a more fertile environment for active management—where security selection, rather than simple index exposure, can play a larger role in outcomes.

Read more: What a Move!