While the S&P 500 and Nasdaq-100 converge, the S&P 500 is simultaneously pulling away from its own equal-weighted version, an index where every constituent carries the same weight regardless of market cap.

For years, the rolling correlation of daily returns between the S&P 500 and the S&P 500 Equal Weighted index regularly sat above 0.95, reflecting a market where broad participation drove returns.

Since 2020, that relationship has deteriorated. The correlation has trended lower, often hovering around 0.8 for both 6-month and 12-month rolling periods, with notably wide and volatile swings. The widening gap between the lightest and heaviest sector weights in the S&P 500 is a key reason, and as concentration increases, the market-cap index and the equal-weighted index tell increasingly different stories about market performance.

Extreme sector concentration in the S&P 500 is not without precedent, though today’s situation is arguably unique in its scale and persistence.

The Energy sector surged to nearly 28% of the S&P 500 in 1980 in the wake of the oil price shock, then retreated steadily to roughly 3% today. The IT sector climbed from 7% in 1990 to approximately 33% at the peak of the dot-com bubble in March 2000, only to revert to mid-teen weightings in the early 2000s as the bubble unwound. The Financials sector reached between 20% and 22% in the years preceding the 2008 financial crisis — a weight that included real estate, which was later carved out as its own standalone sector in 2016.

In each of those cases, concentration was followed by reversion. However, the current IT cycle may be  different: it began its sustained climb above 15% in 2009, has now been building for over 15 years and currently sits at roughly 39% — a level that surpasses every historical peak and shows no immediate sign of mean-reverting.

Correlation changes between these benchmarks are a result of sector weights shifting and the growing differential between the largest and smallest weighted sectors. Worth noting, moments when the heaviest-weighted sector corrects and causes the S&P 500 to decline may trigger rotation into other sectors, potentially allowing the equal-weighted index to hold steady or rise relative to the cap-weighted version.

As for the broader question of what’s behind the concentration itself, some argue it reflects momentum-driven risk, while others see it as a structural shift in how the economy creates value through technology and new industries. Or perhaps it’s both: a new industry that quietly develops for years, then hits a tipping point where a wider audience discovers it all at once.