Major stock market indices such as S&P 500 and NASDAQ made new highs yesterday. S&P 500 reached a tad higher to 7023 mark just as it has been timidly doing in last few months to make new highs.
Revealing factor?
None of the top 10 market cap stocks ranging from Nvidia (NVDA) to Walmart (WMT) reached new heights. None. Not a single one. That is quite telling. Isn’t it?
They are all down respectively from 26% to 3% with Microsoft (MSFT) being the most impacted at 26% to Alphabet (GOOG) at 3%.
Walmart (WMT) again got booted out of the trillion-dollar club as it continues to flirt with the exclusive club membership. Earlier, we covered it under the following post about two weeks back: First Trillion Dollar Valuation Club Casualty: Walmart (WMT)
Bright spot? The small cap and midcap stocks continue to strive to make its comeback and reassert its position as they have been brutally killed by the ‘unjust’ market forces in recent years. A big penchant towards the “Magnificent Seven” and mega-caps contributed to the decline of small cap stocks and now they themselves have been on the decline for the right reason. Finally, investors appear to be waking up to “value” stocks and more “reasoned” investments as opposed to the blind following of major names.
Yet, we are far, far away from shaking down all the fascination with investing in big names regardless of any corresponding fundamentals or thesis. It has been a game of a mindless investing for so long and it will take a while to shake it all off or to “wean” investors off of that habit like weaning off of the sleeping pills or worse yet the cocaine doses. Our fear is that it will get ugly, really ugly, before things start getting better and healthy again. History shows that time and again. No exceptions. No mercy.
Historically, a stock market reaching new highs without the leadership of its top market-cap stocks (often called a “narrow” rally) is rare. Usually, because major indices like the S&P 500 are market-cap weighted, it is mathematically difficult for the index to hit a record high if its largest components are lagging.
However, there have been distinct “regime shifts” where the broader market (small and mid-caps) leads the way while mega-caps underperform. We have seen it happen before such as during post dot com bust. The rotation occurred during 2003 to 2006 from the large cap stocks to the small and midcap stocks.
After the tech bubble burst in 2000, the “Mega-Cap Tech” era ended. While the S&P 500 took until 2007 to reach a new nominal high, the equal-weighted version of the market and mid-cap indices hit new highs much earlier. Small and mid-cap stocks outperformed significantly as investors fled the overvalued giants of the late ’90s. From 2003 to 2006, the market stayed bullish, but the “leaders” were energy, materials, and industrials, rather than the top-cap names from the previous decade.
Prior to that, a similar dynamic occurred during 1975 to 1983, perhaps the most famous period where the “top” didn’t lead. Following the “Nifty Fifty” bubble, the mega-caps of the early ’70s, the largest stocks were stagnant for a very long time. Then, small cap stocks entered a massive bull market. While the headline S&P 500 was often weighed down by the “old guard” of sluggish industrial giants, the average stock was making massive gains and hitting individual new highs.
A similar shift is underway now, yet, it is still in its early innings and many macro factors continue to hamper its progress including high interest rates, fiscal situation, Iran war and other complex geopolitical situations. Between July 2025 and February 2026, the Russell 2000 index for small caps surged roughly 22%, while the S&P 500, the de facto large cap index, rose only about 11%. Thus, after years of “Magnificent Seven” dominance, the market has begun to rotate in the second half of 2025.
The irony is that even though S&P 500 index along with NASDAQ reached new highs, Dow Jones Industrial Average (DJIA) and Russell 2000 index did not.
Hence, it is time to take advantage of the market rally, which is toothless and cannot last for long without gaining a solid footing on many different fronts. In fact, it is quite the opposite and we need to be preparing for a perfect storm as we have mentioned a few times in recent months. It is advisable to lighten up on the big names, especially the overvalued ones and start selectively choosing the small and midcaps.
Overall, it is a high time to “increase” the quality of our portfolio, not just a namesake and by holding a “seemingly” high quality, though, a “real” high quality names considering multitude of factors.
In summary, while a “Bull Market” almost always includes the whole market eventually, there have been 3 to 4 major eras in the last 50 years where the market made progress specifically while the largest companies were “dead weight”:
- Late 1970s: Post-Nifty Fifty collapse.
- Early 1990s: Recovery from the 1987 crash/1990 recession.
- 2003–2006: Post-Dot-Com era.
- 2025–2026: The current “Great Rotation” out of AI-driven concentration.
When this happens, it is usually viewed by economists as a “healthy broadening,” suggesting the economy is strong enough to support thousands of companies, not just a handful of tech titans.
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