The S&P 500 Just Had One of Its Strangest Months in Years. History Says This Usually Doesn't Last.

If you look at what the S&P 500 (SNPINDEX: ^GSPC) did in September, you might not think anything unusual happened. The index was down only 0.5% and traded in a relatively tight range. Volatility was mostly in check.

But look under the surface, and you'll see a more disturbing trend.

Consider these numbers for September:

• 78% of the S&P 500 stocks fell.
• 60% of them fell by at least 5%.
• 27% of them fell by at least 10%.

That's far from an uneventful market. The damage showed up in the S&P 500 Equal Weight index's return, which fell by more than 4% during the month.

History says that divergences like this usually reverse, but the timing is very unclear.

Image source: Getty Images.

We've seen this before from U.S. stocks

Narrow megacap tech leadership was evident throughout most of 2023 to 2025. The artificial intelligence (AI) boom benefited the largest companies, which were the first and biggest spenders, and we saw the continued emergence of the "Magnificent Seven" stocks.

This year, however, the trend started to reverse. The market rally broadened considerably, with defensive, value, and small-cap stocks significantly outperforming the S&P 500. But now that the Fed is raising rates, the war in Iran has no end in sight, and inflation remains stubbornly above 3%, investors are returning once again to the familiar, comfortable, high-quality megacap tech names.

Throughout history, there have been multiple stretches where large caps lead for several years before the trend reverses and equal-weight indexes outperform for several years.

The best example might be around the tech bubble. The S&P 500 outperformed the S&P 500 Equal Weight index for roughly five years before the bubble burst. Following that, equal weight outperformed pretty consistently from 2000 through the beginning of the financial crisis seven years later.

Equal weight might be overdue for its turn again.

September's performance isn't a sell signal

Because narrow leadership can last for a while, September's performance is a sign that they should rotate out of S&P 500 products like the Vanguard S&P 500 ETF (NYSEMKT: VOO). But they shouldn't ignore what equal weight's historic underperformance is saying either.

Back in 2000, it ultimately signaled that the megacap rally had moved too far, too fast and needed to normalize. But that was also a heavily valuation-driven collapse. Today's market is much more fundamentally supported. The AI capital expenditure (capex) boom could support additional revenue and earnings growth for some time.

Plus, investors don't want to be making major portfolio changes based on a single month. The Vanguard S&P 500 ETF is a great long-term core holding. But something like the Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) provides an alternative for those wanting to own that same large-cap universe while de-emphasizing some of the megacap currently dominating the index.

If history repeats, adding some equal weight before market leadership eventually broadens again could be a sensible path for buy-low investors.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.