Key Takeaways:
The S&P 500 Equal Weight Index has climbed 15% in 2026, a gain that has outpaced its cap-weighted counterpart as returns spread across sectors rather than concentrating in the largest technology names.
"Earnings are the mother's milk of stocks," Phil DeAngelo, managing director at Focused Wealth Management, said. "From there we're looking at relative valuations and where capital spending is flowing. We're already seeing compelling setups in areas like equal-weight and small- and mid-cap companies, but I don't view that as a rotation out of technology. It's a broadening of opportunity."
The breadth reading is corroborated by constituent-level data. S&P Dow Jones Indices found that more than 60% of S&P 500 members outperformed the index in both June and July 2026, a level well above the concentration-driven markets of 2023 through 2025. In the technology sector specifically, the equal-weight index has beaten its cap-weighted equivalent by 19% year-to-date, according to the index provider's research.
The widening shows up in profit margins as well. Pedro Palandrani, head of product research and development at Global X ETFs, said forward profit margins for the S&P 493 — the index excluding its largest constituents — have climbed steadily off their post-2022 lows toward roughly 14%, "the kind of broadening in earnings power that historically precedes a broadening in leadership." Megacaps still command a premium, with around 31% forward margins backing valuations near 23 times earnings, "so this isn't about the leaders faltering; it's about the opportunity set widening beneath them."
Advisor positioning is already adjusting to the wider opportunity set. Industry data shows registered investment advisers added net new ETF positions across portfolios through the first quarter of 2026, with real assets and active strategies among the categories gaining the most traction. The Investment Company Institute reported that long-term index funds and ETFs took in $123.84 billion in July 2026, even as long-term active funds saw $31.06 billion in net outflows for the month.
Matt Barry, vice president of product management, sub-advisory research and ETF capital markets at Touchstone Investments, said small-cap stocks are showing stronger earnings and revenue growth that could let them benefit disproportionately from broader participation. Developed international equities offer an improving backdrop as European growth proves more resilient than expected, he added, providing a complement to US megacap exposure given their lower reliance on the AI investment theme.
"A key consideration is whether a broad-market ETF provides enough exposure to the opportunity an advisor wants to capture," Barry said. "If an advisor has conviction in small caps, emerging markets, or another segment that represents only a modest portion of a broad benchmark, a targeted ETF can be used to intentionally overweight that exposure."
The broadening debate has reopened the question of where active management earns its fee. Palandrani draws the line at market efficiency: in emerging or fast-moving technologies, picking eventual winners is genuinely difficult, an argument for passive thematic exposure that captures the full universe of companies tied to a trend rather than betting on individual names.
"Active earns its keep in the corners of the market that are structurally less efficient, where local knowledge and selection actually move the needle," Palandrani said, pointing to markets including India and Brazil.
Barry said active management has the most room to add value where dispersion is higher and benchmarks are more concentrated, naming parts of the small-cap, international, emerging markets, and fixed income universes. He added that advisers should assess whether a manager's portfolio is genuinely differentiated from its benchmark.
DeAngelo cautioned against turning diversification into a market-timing exercise. Broad ETFs should remain the core of a portfolio, he said, with targeted exposure added only where there is a meaningful valuation gap or a durable fundamental driver — equal-weight strategies being one way to participate in a broadening market without guessing which sector leads next.
The mechanics of that approach have become easier to execute as the ETF wrapper has scaled. Assets in US ETFs have climbed toward the $21 trillion mark, giving advisers more building blocks to combine passive core holdings with active or thematic satellite positions.
"In a broadening market, I think there's room for both: passive for the core and active where selectivity can actually earn its keep," DeAngelo said.
The next test of the breadth thesis arrives with third-quarter earnings, when the share of S&P 500 companies beating the index will show whether the widening that began in June has held through the second half.
This article is for informational purposes only and does not constitute investment advice.
