This Index Just Did Something It Hasn't Done Since 2009. Is It Time To Buy?

With tech stocks having fallen by roughly 10% from their all-time high in early October, a historic gap has opened between that sector and the rest of the market.

The equal-weight version of the S&P 500 just had its single best monthly outperformance of the traditional index in more than 17 years. It returned 5% in October, compared with a loss of around 0.8% for the S&P 500.

Obviously, this kind of dichotomy doesn't exist without a major shift in the U.S. equity market. The decline in tech and the "Magnificent Seven" stocks is the biggest catalyst. But more than 70% of S&P 500 components were actually up on the month. There's also a much larger rotation happening below the surface.

Source: Getty Images.

Equal-weight S&P 500 is now the leader in 2026

On October 7, the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) was trailing the Vanguard S&P 500 ETF by nearly 4% on a year-to-date basis. As of the end of October, it's leading by roughly 3.6%. So this has been a significant shift away from big tech, which had accounted for around 39% of the S&P 500.

RSP Total Return Price data by YCharts

It'd be easy to see what's happening in tech and say that the U.S. equity market is selling off. But it isn't. You just need to see where the returns are coming from.

The Vanguard Information Technology ETF and the Vanguard Communication Services ETF, which includes NVIDIA, Microsoft, Apple, Alphabet, Meta Platforms, and Broadcom, were the only two S&P 500 sectors that were negative in October. The rest were positive, some significantly so.

VDE Total Return Price data by YCharts

I think the biggest story is what was leading last month. The top four performing sectors were energy, consumer staples, utilities, and healthcare.

Energy stocks continue to perform strongly, with Brent crude oil prices flirting with $120 a barrel. The other three sectors are all considered defensive equities. The positive overall performance of the Invesco S&P 500 Equal Weight ETF shows that investors are still buying stocks. But they're unquestionably rotating into more conservative, non-growth areas of the market.

This rally looks different from 2009

When this last occurred 17 years ago, the whole market was in the process of recovering from the financial crisis. The S&P 500 bottomed out one month earlier, and it wasn't surprising to see small-caps outperforming large-caps. It's a pattern we often see in the early stages of a recovery cycle. The turnaround from the COVID bear market in the latter half of 2020 is a good example.

We're not in a recovery cycle today. We're just in an environment where a handful of major tech stocks have been pulling the indexes higher. Whenever you have that kind of top-heavy concentration, the S&P 500 is vulnerable to a sharp pullback whenever the theme that's been driving them higher starts to cool. That looks like the point we're at now with the AI boom. The heavy capex spending that got investors excited about a year ago is raising investors' concerns now.

In terms of speculating about how the market could progress from here, I believe a 2009 environment would produce a higher likelihood of an extended run for the equal-weight S&P 500. It could still happen in 2026, but it just takes a change in investor sentiment to kill the rally.

How to invest in the S&P 500 right now

Tech stocks have been leading the market pretty much non-stop since the beginning of 2023. It's not surprising that an eventual correction would happen.

But this is exactly why the argument for diversification is so strong. Whether it's just a modest addition of smaller companies via the Vanguard Total Stock Market ETF or a more dramatic shift with the Invesco S&P 500 Equal Weight ETF, taking some tech exposure off the table probably isn't a bad idea.

Plus, consider how equal-weight tends to outperform cap-weight in a recovering market or economy. The better long-term play right now could be going with the equal-weight option.

David Dierking has positions in Apple, Vanguard Information Technology ETF, and Vanguard Morningstar Total Stock Market ETF. The Motley Fool has positions in and recommends Alphabet, Apple, Broadcom, Meta Platforms, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.