The Average Stock Is Beating the Index — Read That Again

For two years, the most repeated complaint about the US stock market was concentration: a handful of AI giants dragging the index while the average stock went nowhere. We wrote about it repeatedly — the top ten stocks reaching about 40% of the S&P 500, index funds quietly becoming tech funds. So it seems only fair to report the sequel: in 2026, the equal-weight S&P 500 is beating the cap-weighted index handily. The iShares Russell 2000 small-cap ETF is up 19% this year. The average stock is winning again.

What broadening out actually looks like

It doesn’t look like a celebration — it looks like this month. The Nasdaq falls, semiconductor stocks crater, IBM implodes, headlines scream selloff, and yet the Dow touches records, retailers quietly post their best week in ages, refiners double, and small caps grind higher. Money isn’t leaving the market; it’s redistributing across it. That’s precisely what a healthy broadening looks like from the inside: uncomfortable for the previous winners, invisible in the headline index, and excellent for everything else.

The irony is thick. Investors spent 2024 and 2025 wishing the market weren’t so dependent on seven stocks. Now it’s happening — and because the mega-caps are such a large index weight, the transition registers as flat-to-down index days that feel like weakness. If you only watch the S&P 500’s level, you’re watching the one number least able to show you what’s changed.

What it means if you own index funds

First, the good news: this is the scenario where diversification starts paying you back. The other 490-odd stocks in your fund, dead weight during the AI melt-up, are now doing the lifting. Second, the honest caveat we’ve made before still applies — cap-weighted funds like VFV, VOO, and XUS remain heavily concentrated in the former leaders, so a rotation away from them mutes your gains even as most of your holdings rise. That’s not a flaw; it’s the deal cap-weighting offers. Third, for those who want to lean into breadth deliberately, the boring tools exist: equal-weight index funds and small-cap funds are the direct expression, and they don’t require predicting which sector wins next.

Our honest take

We’d resist the urge to treat rotation as a regime you should trade. Broadenings can reverse — one blowout earnings report from the AI complex could restart the old pattern, and small caps’ 19% run already assumes a lot of good news about rates that a hiking Fed could complicate. The real lesson is quieter: the market just demonstrated, in real time, why owning everything beats guessing. The people best positioned for 2026’s rotation were the ones who never positioned for anything at all. That’s not a coincidence. It’s the whole strategy.