The stock market is doing something it hasn’t done in over half a century and could announce a big move in 2025

The S&P 500 (SNPINDEX: ^GSPC) rose to new highs in recent weeks as the bull market entered its third year. But not every stock participated equally in the rally.

Over the past few years, big tech stocks have had an outsized impact on the value of the S&P 500. Innovation and investment in artificial intelligence (AI) has been a major factor over the past two years, favoring the largest companies with cash to spend. As a result, the big ones have become bigger.

And there are good reasons for that. Investors expect all AI spending to pay off in the long run through faster profit growth, and they have increased prices from these major investors due to high expectations for the future. Meanwhile, companies that don’t have the capital to invest as much in AI, or that simply aren’t as directly impacted by AI innovation, haven’t seen their valuations rise at the same rate.

However, one indicator suggests that the recent trend of the largest companies growing far faster than the rest of the market may soon be coming to an end. And there’s a great way to invest to take advantage of the stock market’s next rise.

A big warning sign for investors

While the big tech companies outperformed, the market became increasingly focused on just a few big winners. For example, the three largest companies in the world, Apple, NvidiaAnd Microsoftnow make up over 20% of the entire S&P 500.

S&P Global uses a different metric to assess market concentration. The average market capitalization of the S&P 500 is used and compared with the index-weighted average. The latter will place more emphasis on companies with larger market capitalizations. As market concentration increases, the ratio of the weighted average to the unweighted average increases.

At the time of this writing, the ratio was about 10 to 1. That’s higher than any level calculated by S&P Global in 1970.

That should be a big red flag. Those who invest in a typical S&P 500 index fund are not as diversified as they might think. Worse, if the concentration trend reverses (and these trends tend to reverse at some point), investors could be in for a prolonged period of underperformance. One of the reasons for this is market concentration Goldman Sachs‘ current forecast for a decade of minimal market returns.

When will the trend reverse?

There’s no telling when the market will turn away from the big tech companies that have driven the S&P 500 higher in recent years, but there are signs it could happen sooner rather than later. It’s not just that the market has reached a new peak of concentration, but also that economic factors could favor smaller companies.

As the Federal Reserve raised interest rates and the money supply tightened, this increased the advantage of large technology companies in being able to invest large sums in the growth of their companies and advances in artificial intelligence. The opposite could be the case in the future.

In September, the Fed made its first rate cut since 2020 and this could be the start of a long cycle of rate cuts over the next few years. The U.S. money supply is already growing at an accelerating rate, which is one of the first signs of a reversal in market concentration. The change could therefore take place as early as next year.

The easiest way to invest in a trend reversal

There’s no need to pick the “best of the rest” in the S&P 500 if you want to avoid the stocks that have driven the market to such a high level of concentration. There is no guarantee that Apple, Nvidia and Microsoft will not continue to dominate the market for a long time. However, investors can reduce their exposure to the largest companies and increase the amount they invest in the smaller components of the index by purchasing an equal-weighted S&P 500 exchange-traded fund (ETF).

The Invesco S&P 500 Equal Weight ETF (NYSEMKT:RSP) is the easiest and most cost-effective way to invest in the equal-weighted index. The expense ratio is 0.2% and has been managed since inception to avoid capital gains distributions. It simply invests the same amount in each component of the S&P 500 and adjusts to the official index every quarter.

Over the long term, the equal-weighted index has outperformed the market-weighted index. Of course, it performs better in years when market concentration decreases, while it performs worse in years when market concentration increases.

Therefore, the equal-weighted index has not favored over the past five to ten years. However, if you believe that current levels of concentration are unlikely to continue, you should consider adding the Invesco fund to your portfolio or shifting some of your assets to the equal-weighted index.

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