Indexology^® Blog

U.S. equity markets have been whipsawed in the past few days, with initial optimism surrounding Big Tech earnings powering the S&P 500^® to an intraday high, and subsequent disappointing reactions to earnings coupled with the Fed’s decision to hold rates steady leading to a sharp retreat for The 500^®.

The pullback in Tech and the rotation toward small-cap stocks have been major market themes that have characterized the start of 2026.¹ The S&P SmallCap 600^® has outperformed The 500^® by 4% month-to-date as of Jan. 28, 2026, propelled by strong economic growth and robust corporate earnings.

As the breadth of returns has started to expand beyond mega-cap leaders, it may be an interesting time to examine equal-weight strategies, which by design have a small-cap bias and offer a more broad-based footprint than their capitalization-weighted peers.

Exhibit 1 shows that the S&P 500 Equal Weight Index outperformed the capitalization-weighted S&P 500 by 3% over the three months ending Jan. 28, 2026, coinciding with a decline in market concentration, with the aggregate weight of The 500’s top 10 companies falling below 40% since Q3 2025.

Notably, market participation has expanded beyond the mega-cap names. Following the peak in concentration in early November, the sources of the S&P 500’s performance have shifted across the capitalization spectrum. Exhibit 2 shows that while the top 100 companies accounted for the majority of the index’s gains for most of 2025, mega-cap weakness has caused their contribution to decline considerably since then, as outperformance has shifted to the bottom 400 companies.

Sector-level dynamics further explain this shift. In a Brinson sector attribution of the S&P 500 Equal Weight Index versus the S&P 500, Exhibit 3 shows that the S&P 500 Equal Weight Index’s underperformance for most of last year and its subsequent outperformance relative to the S&P 500 was largely driven by an underweight in Information Technology, consistent with the sector’s recent travails.

The S&P 500 Equal Weight Index’s factor profile has also played a supportive role. In addition to its small-cap bias, the S&P 500 Equal Weight Index has historically maintained a persistent tilt toward value and away from momentum, as the strategy, by definition, regularly rebalances away from relative winners and toward relative losers. These factors have benefited from improving market breadth and a rotation away from large-cap growth- and momentum-oriented stocks. Notably, the S&P 500 Value has outperformed S&P 500 Growth, and the S&P 500 Momentum Index has underperformed The 500 by 2% so far in January.

Exhibit 4 shows that periods of extreme relative S&P 500 Momentum Index outperformance have often been followed by outperformance in the S&P 500 Equal Weight Index, reflecting the naturally inverse relationship between the two approaches. This historical trend may be particularly relevant following the S&P 500 Momentum Index’s stellar outperformance in 2025.

If the headwinds facing Big Tech continue to worsen, the increase in market breadth and the rotation away from large caps may potentially persist. We do know that periods following extreme market concentration have historically coincided with the outperformance of the S&P 500 Equal Weight Index, and it may be useful for market participants to understand the sources and drivers of the strategy’s relative performance.

¹ The Wall Street Journal, “Small Stocks Finish Week at Records,” Jan. 16, 2026. 

The late-cycle economy is defined as the final phase of the macroeconomic cycle when economic activity hits its peak. The period is characterized by high but slowing growth, rising inflation that may affect profit generation, a tight labor market and volatility in interest rates.

Given these conditions, many market participants are considering how best to approach diversification to navigate an environment characterized by heightened market risk and uncertainty around future corporate profits and economic growth. With the S&P 500^® currently highly concentrated in a few sectors and stocks, addressing these challenges can involve a range of strategies—from broad asset allocation to more selective stock picking.

In this blog, we examine the S&P 500 Market Leaders Index as a potential strategic solution. Launched on Nov. 11, 2024, this index tracks leading companies within The 500^® as identified by their consistently high free cash flow margins, strong returns on invested capital and significant market share.

In 2025, The 500 recorded strong performance, driven by ongoing momentum. The S&P 500 Market Leaders Index also performed well compared to its benchmark. Over the long-term back-tested period, the S&P 500 Market Leaders Index delivered strong results, outperforming The 500 both in absolute terms and on a risk-adjusted basis (see Exhibit 1).

Additionally, the index has historically outperformed The 500 during most market downturns while showing lower volatility and a reduced downside capture ratio. This performance can be especially notable in the late stages of the economic cycle, when markets are more prone to stress events.

Fundamentally, the S&P 500 Market Leaders Index is most similar to a traditional quality strategy—tracking constituents that tend to demonstrate higher margins, strong returns on capital and lower leverage (see Exhibit 2). The strategy’s significant emphasis on higher profitability may render it more defensive than other quality strategies because the most profitable stocks typically have a larger “margin of safety,” allowing them to withstand economic shocks or slowing growth while remaining profitable.

The focus on high market share bolsters the index’s overall defensive characteristics, as companies with substantial market share typically benefit from competitive advantages that establish a defensive “moat” around their business models. Tangible benefits of a defensive moat may include pricing power (allowing higher cost inflation to be passed through to pricing), lower sourcing costs and the ability to leverage economies of scale or network effects to sustain revenue, thereby enabling companies to remain profitable throughout the business cycle.

Quality characteristics may resonate more in some sectors than others. Exhibit 3 shows that historically the highest overweight has been in the Information Technology and Consumer Staples sectors. However, the current weight in Financials is much higher than it has been historically, reducing the underweight in the sector.

The S&P 500 Market Leaders Index includes 5 of the Magnificent 7 companies (it does not contain Amazon or Tesla). These companies are distributed across Information Technology, Consumer Services and Communication Services. The total weight of these constituents in the index is 22.7%, however the S&P 500 benchmark universe holds a 34.9% weight.

The S&P 500 Market Leaders Index’s strong outperformance in periods of economic stress is empirically demonstrated in the back-tested period, where the index outperformed The 500 across all macroeconomic environments—most significantly in falling growth environments.

The S&P 500 Market Leaders Index may provide a source of diversification relative to the benchmark universe, potentially providing a framework for navigating late-cycle market conditions.

2025 Market Performance

Markets delivered a strong year in 2025 across most parts of the globe. The S&P World Index was up 23%, while the S&P 500^® was up 18% and posted 39 record closing highs during the year, despite persistent geopolitical, tariff and inflation pressure.

Sector leadership in the U.S. was taken by Communication Services and Information Technology, consistent with the market narrative dominated by continued investor focus on AI and digital infrastructure. The “AI story” was not uniform across tech though—gains remained concentrated in hardware, data centers and computers, while software lagged.

Fixed income indices generally delivered positive performance globally in 2025. Monetary policy in the U.S. moved onto a rate-cutting path in the second half of the year. Federal Reserve rate cuts pushed short-term Treasury yields lower, with credit outperforming government bonds.

Debt markets were increasingly tapped to finance structural investment themes, particularly AI-related infrastructure. Issuance linked to data centers and AI projects continued to rise.

Commodity performance in 2025 was led by Metals, while Energy was weak. Precious Metals performed particularly well, with Gold and Silver reaching multiple record highs over the year. Industrial Metals also strengthened, benefiting from supply constraints and rising structural demand linked to higher demand for electricity and growing power needs from data centers and AI infrastructure. In contrast, Crude Oil prices generally declined in 2025 because global supply exceeded demand.

Leading Thematic Performers in 2025

The strongest-performing themes in 2025 from our S&P Thematics Dashboard were generally supported by tangible, near-term investment.

Precious Metals led the year. Silver (up 132%) and Gold (up 106%) stood out as macro uncertainty and ongoing geopolitical tensions sustained demand for real assets. Central bank buying and constrained supply¹ added fuel to the movement.

We also saw strength across the broad materials complex. Metal & Mineral Mining (up 95%) and industrial metals such as Copper (up 75%), Nickel (up 60%) and Aluminum (up 47%) were supported by power-grid expansion tied to higher electricity demand and advanced manufacturing buildouts.

Technology leadership was driven by the physical infrastructure linked to AI, while Software underperformed. Telecommunications Satellites (up 77%), Optical Communications (up 73%) and Data Centers & High-Performance Computing (up 71%) benefitted from the need to supply power and expand network capacity. As questions around AI monetization grew louder, investors gravitated toward areas where demand was tangible and near-term.

Defense-linked themes were another clear area of strength. Weapons (up 45%), Defense Technology (up 44%), Aerospace (up 42%) and Aerospace & Science Satellites (up 74%) advanced on the back of sustained geopolitical tensions and rising defense budgets. Also, adjacent themes like Space saw strong momentum in 2025, with the S&P Kensho Global Space Index up 53%. The index has approximately 58% of its constituents classified as Aerospace & Defense.

Quantum Technology in 2025

Quantum Technology deserves special mention. After posting triple-digit gains in the first half of the year, the theme ended 2025 up a still-impressive 64%. In 2025, global quantum technology-linked ETFs reached approximately USD 4.3 billion in AUM, adding to the momentum in the theme.

Where Themes Struggled

Underperformance in 2025 was mostly driven by AI- and automation-related initiatives and a corporate focus on protecting margins. Staffing Services, Human Resources and Business Consultancy were down 19%, 17% and 14%, respectively.

Discretionary spending themes also had a tough year. Restaurants, Bars & Cafes (-8%), Alcoholic Beverages (-11%) and Packaged & Processed Foods (-10%) struggled with uneven real income growth across income cohorts and ongoing margin pressure. Consumer Retail also lagged, delivering a modest 3% return, as selective consumer spending continued to weigh on volumes.

Themes Carrying Forward into 2026

Market attention entering 2026 remains focused on areas where there is demand.

• Electricity usage linked to AI demand: Rapid data center expansion continues to strain power availability, keeping electricity and power infrastructure in focus.
• AI adoption moving into real-world applications: Interest is moving toward practical deployment. Healthcare, robotics and autonomous vehicles are gaining traction as use cases move from concept toward early implementation. Momentum has been particularly notable in parts of Asia.
• Blockchain applications beyond cryptocurrency: Regulatory progress and rising institutional engagement have directed attention toward stablecoins and tokenization. Banks and corporations increasingly use blockchain to modernize payments and broaden financial infrastructure.

¹ Thukral, Naveen and Lucas Liew. “Silver shines in 2025 global market spotlight as softs, oil lag.” Reuters. Dec. 31, 2025.

In 2025, the S&P Kensho Global Space Index ended 2025 up 57.79%, outperforming both the S&P 500^® (up 17.66%) and the S&P Global BMI (up 21.75%). The strong performance was not unique to last year; it has outperformed over the past four years, and it outperformed in annualized terms over the past three and five years (see Exhibit 1).

This positive performance reflects the growing relevance of the space segment. In fact, by 2035, the space economy is expected to reach USD 1.8 trillion USD,¹ which is roughly equivalent to South Korea’s GDP. In recent years, the industry has been undergoing a transition from government-dominated funding to an evolving private sector participation that has propelled technological breakthroughs,² like reusable launch vehicles. These developments have contributed to lower operational costs and higher ROI, ³ specially for sending spacecraft into orbit. As a result, the industry is witnessing new commercial opportunities,⁴ from cutting-edge satellite communication services to leasing space stations for biotech or materials research, transforming it into a hub for diverse business opportunities.

In this diverse and emerging industry, many firms have diversified business involvements that extend beyond space-related ventures. For example, Boeing, while known for manufacturing airplanes, has begun collaborating with NASA to make rockets.⁵ Because of these nuances, the S&P Kensho Global Space Index uses a natural language processing (NLP)-based approach that analyzes company descriptions and filings to identify firms that are focused on space-related activities. It includes not only businesses involved with spacecrafts, launch vehicles or space stations, but also those supplying critical components, services and infrastructure. Moreover, the index may feature companies participating in satellite technology, asteroid mining and military space advancements. For more information, refer to the index methodology.

Companies in the Aerospace & Defense industry of the GICS classification are frequently associated to the space theme. In fact, 57.6% of the weight of the S&P Kensho Global Space Index was classified under this industry as of Dec. 31, 2025 (see Exhibit 2). However, if we look into RBICS data, a classification system that is based on revenue sources, space-related equities do not necessarily rely only on income streams exclusively associated to defense (see Exhibit 3).

Interestingly, in a year in which defense stocks were among the best-performing industries globally, the space theme fared better. In 2025, the S&P Kensho Global Space Index outperformed the S&P Global BMI Aerospace & Defense (Industry), which was up 49.66% (see Exhibit 4). From the 18.1% surge that the space-focused index had from August 2025 to year-end 2025, more than half of the performance was attributed to five companies that are not classified within the Aerospace & Defense industry, demonstrating that the space theme’s growth is not solely dependent on defense.

Looking at the sources of revenue that contributed the most to the S&P Kensho Global Space Index’s 57.79% performance, RBICS data shows that, among the top 10 contributors, 7 are not uniquely linked to the defense domain (see Exhibit 5). This highlights the emergence of space as a standalone theme that goes beyond traditional defense applications.

In recent years, the S&P Kensho Global Space Index has performed well. Due to its thematic approach, it can be used as the spaceship to navigate the complex galaxy of the space economy and its participants, characterized by diverse business models, emerging technologies and multifaceted revenue streams.

¹ Space: The $1.8 Trillion Opportunity for Global Economic Growth – INSIGHT REPORT – APRIL 2024 – World Economic Forum

² Space tech: Experts name 12 transformative technologies reshaping our cosmic future – World Economic Forum

³ The Space Boom Is Here – Global Finance Magazine

⁴ A Guide to Identifying Business Opportunities in the Space Economy – New Space Economy

⁵ The past, present, and future of Boeing in space – Astronomy.com

The Rapid Growth of Private Credit

Private credit, broadly defined as non-bank lending directly to companies outside traditional public markets, has seen remarkable growth over the past decade (see Exhibit 1). This segment of finance includes direct loans, mezzanine debt and other debt instruments extended primarily to middle-market companies with annual revenues between USD 10 million and 1 billion.¹ The surge is largely due to regulatory changes that were made after the 2008 financial crisis, which tightened banks’ lending capacities, especially to smaller and mid-sized firms.²

In investment spaces, investors have increasingly turned to private credit, seeking higher yields amid a low-interest rate environment and greater diversification. The global private credit market is projected to grow to approximately USD 2.6 trillion by 2029, with direct lending remaining the largest and fastest-growing category.³

Among the various entities operating within direct lending, business development companies (BDCs) have emerged in recent years and now manage about USD 500 billion in assets.⁴

BDCs: A Regulatory Structure Designed to Channel Capital into Private U.S. Businesses

A BDC is an investment vehicle created by the U.S. Congress in 1980 under the Small Business Investment Incentive Act.⁵ This legislation amended the Investment Company Act of 1940 to establish BDCs as a new type of closed-end fund aimed at providing capital to small- and mid-sized businesses that often struggle to secure traditional bank or lender financing. They give investors the ability to invest in private companies and offer several potential benefits.

• Higher income: BDCs are required to distribute at least 90% of their taxable income to shareholders.⁶
• Lower volatility: BDC returns have tended to be less volatile than traditional public equities because their underlying assets, primarily senior secured loans to private companies, are not marked to market daily and are often held to maturity.
• Diversification compared to public fixed income investments: BDCs invest in private credit with limited correlation to publicly traded bonds, which helps investors reduce interest rate and duration risk.

BDCs can be: publicly traded (USD 175 billion in AUM); private finite non-traded (USD76 billion in AUM); or private perpetual non-traded (USD 253 billion in AUM).⁷ Public BDCs are exchange listed and could offer greater liquidity and accessibility. Private non-traded BDCs are typically limited to accredited or institutional investors, often with higher minimums. Non-traded BDCs may be structured as finite-life vehicles (5-7 years) with a planned liquidity event, or as perpetual funds that raise capital continuously.

BDCs Bridge Lending Gaps and Expand Access to Private Credit

Private credit has become a vital part of the financial ecosystem, especially as banks have pulled back on lending to riskier or smaller borrowers due to tighter regulations. This pullback has created opportunities for BDCs, which fill the gap by offering flexible financing solutions.

It’s notable that some BDCs are publicly traded, allowing investors to buy and sell shares easily—something uncommon in the private credit space. This accessibility opens the door for many types of investors to participate in private credit markets.

The S&P BDC Index

The S&P BDC Index tracks publicly traded BDCs that meet certain size, liquidity and quality standards, giving market participants a broad and diversified view of the sector. The index follows transparent criteria and is rebalanced regularly to reflect changes in the market.  It also includes a variety of BDCs with different focuses, helping to provide a balanced view of private credit.

The index can serve as a benchmark for funds and ETFs seeking to provide BDC exposure in the private credit direct lending space. Exhibit 3 presents a five-year performance comparison in total return terms between the S&P BDC Index and other indices, showing that it outperformed them for much of the period.

Historically, a high dividend yield has been one of the defining characteristics of BDCs. In 2025, the top eight constituents in the S&P BDC Index offered yields ranging from approximately 6% to 16% (see Exhibit 4).

BDCs can provide a bridge between investors and growing companies needing capital beyond traditional lenders. As private credit expands, S&P Dow Jones Indices will introduce new offerings related to BDCs, direct lending and the broader private credit market.

¹ Cai, Fang and Sharjil Haque. “Private Credit: Characteristics and Risks.” U.S. Federal Reserve. Feb. 24, 2024.

² “The Impact of the Dodd-Frank Act on Small Business.” Research Dept. Working Paper No. 1806 – Dallas Fed.

³ “Private Credit Outlook 2025: Opportunity & Growth.” Morgan Stanley. Dec. 18, 2024.

⁴ Nangle, Tony. “Inside the big boom in ‘business development companies’.” The Financial Times. Sept. 19, 2025.

⁵ “H.R.7554 – 96th Congress (1979-1980): An act to amend the Federal securities laws to provide incentives for small business investment, and for other purposes.” Congress.gov. Library of Congress. Oct. 21, 1980; “H.R.7491 – 96th Congress (1979-1980): Business Development Company Act of 1980.” Congress.gov. Library of Congress. June 4, 1980.

⁶ Office of Investor Education and Assistance. “Publicly Traded Business Development Companies (BDCs): Investor Bulletin.” Investor.gov U.S. Securities and Exchange Commission. Dec. 13, 2024.

⁷ Figures based on Q2 2025 data from Berlin, Andrew. “BDC Quarterly Wrap: 2Q25.” LSTA. Sept. 3, 2025.