As we approach the end of 2023, investors are grappling with mixed signals in the stock market. Although the Fed signaled rate cuts in 2024, fears of a potential U.S. recession in 2024 and likely consumer slowdown have cast a shadow on the equity markets.

Against this backdrop, Bank of America's head of US equity & quantitative strategy, Savita Subramanian, has offers a reassuring message for equity investors, as quoted on Yahoo Finance.

One of the standout recommendations in Subramanian's note is the bank's "highest conviction call" that the equal-weighted S&P 500 may outperform the standard S&P 500 index. This approach gives equal importance to all stocks, rather than giving more weight to the largest corporations.

Top-Heavy Nature of the S&P 500

Just seven companies – Known as “Magnificent Seven” – now account for about 29% of the S&P 500 index. These companies including Apple, Microsoft, Tesla, Nvidia, Meta, Alphabet and Amazon actually made the rally in the S&P 500 possible this year. 

This concentration of market cap in a handful of mega-cap tech giants is a notable deviation from historical norms. The top-heaviness of the S&P 500 index implies that the performance of these few mega-cap stocks can excessively influence the overall index. This situation might limit opportunities for diversification.

Below we highlight why Invesco S&P 500 Equal Weight ETF (RSP Quick QuoteRSP - Free Report) can beat SPDR S&P 500 ETF Trust (SPY Quick QuoteSPY - Free Report) in 2024.

Historical Outperformance of Equal-Weight Index

Historically, during recovery cycles, the equal-weighted S&P 500 has outperformed the traditional index. This phenomenon suggests that smaller and mid-cap companies could see stronger growth during recovery phases compared to their mega-cap counterparts. Additionally, concerns about deglobalization, such as China's potential reduction in Apple consumption, might have a more substantial impact on large tech stocks than on relatively smaller-sized large-cap stocks.

Opportunity in "Old Economy" Stocks

Savita Subramanian's analysis suggests that the equal-weighted S&P 500 offers an opportunity in "old economy" and less tech-centric companies. These companies, which are predominant in the equal-weighted index, could benefit from the recovery phase just as much as technology and growth companies.

Investors should also note that interest rates in the United States are likely to be higher for longer. Although the Fed has indicated to cut rates by 75 bps in 2024, it is too way higher than the pre-Covid levels. A high interest rate environment is not great for growth stocks. In this environment, many may consider RSP to be a better bet.

Market Participation is Broadening

Of late, the narrow structure of market gains is easing. On the other hand, we have seen a broadening of the rally lately. Hopes for a dovish Fed boosted the broader market where laggards like Real Estate, and Financials started to gain. The investing backdrop of 2024 will no more be centered on the AI boom and the growing digitization. If energy prices ease, the consumer sector will also gain momentum considerably.