Mind on the Market

Mega-caps reshape market dynamics

The S&P 500 soared 14.21% over three months, landing in the 96_^th percentile since 1988—powered by tech earnings, trade optimism, and a resilient market rebound, signaling strength behind elevated valuations and mega-cap dominance.

08 August 2025 8 min read

Saketh Reddy, CFA

Research Analyst, Investment Strategy & Research

The S&P 500 returned a strong 14.21% over the three months ending July 31, 2025, driven by robusttech earnings, progress in trade talks, and a resilient recovery from earlier policy driven volatility.Notably, this performance ranks in the 96^th percentile of all 3-month rolling returns since August 1988,marking a historically exceptional run.

Weekly highlights

S&P 500 Past 3 Months Total Return 14.21%

as of July 31, 2025

S&P 500 Next 12 Months Price-to-Earnings ratio 22.19x

as of July 31, 2025

% of S&P 500 Companies Beating Q2 Expectations 81.35%

as of August 5, 2025

Structural shifts behind elevated multiples

Many equity market observers have raised concerns about market overvaluation, pointing to elevated price to earnings (PE) multiples relative to historical norms. Over the past 30 years, the average 12- month forward PE multiple of the S&P 500 has been 16.71, while the current figure stands at 22.19, representing a 32.8% premium. This deviation has led some to caution that valuations may be stretched. However, this perspective may overlook structural changes in market composition and the evolving growth dynamics of today’s largest companies.

Earnings growth among the largest market cap companies in S&P 500 index has strengthened over the years. Many of today’s index heavyweights, particularly innovative tech firms, are demonstrating robust long term growth prospects. This improvement in fundamentals supports the higher valuation multiples these companies command, which in turn contributes to elevated valuations at the index level. Ten years ago, the top 50 market cap stocks had an average projected long-term earnings growth rate of 11.7%, compared to 10.0% for the rest of the index. Today, that gap has widened. The top 50 boast 12.7%, while the rest have declined to 9.3%. This divergence reflects the superior market positioning and innovation capacity of today’s largest firms, unlike past leaders such as banks, energy companies, and conglomerates, which typically had lower growth trajectories. The data also reinforces the trend of rising market cap concentration, showing that mega cap dominance is not just driven by valuations or investor sentiment but also by stronger fundamentals.

Over the past decade, a small group of companies have increasingly powered index level earnings metrics. To illustrate this trend, we calculated the weighted average long term earnings growth rate¹ separately for the top 50 heavyweights and the remaining constituents of the S&P 500 index. Our analysis reveals that the top 50 stocks now have a weighted average long term earnings growth rate of 8.6%, compared to 3.8% for the rest, up from 5.7% and 5.4%, respectively, a decade ago. As a result, these top companies now contribute 69.2% of the index’s total long term earnings growth, up from 51.1%, highlighting the growing concentration of earnings power among the largest firms.

Given the outsized influence of mega cap stocks on overall market valuations, any regulatory shifts or competitive disruptions to their long term earnings trajectory could have far reaching implications for the broader equity landscape. Rather than signaling speculative excess, elevated valuation multiples may instead reflect a structural transformation, one where market leadership is increasingly concentrated among a select group of high growth, innovation driven firms. Understanding this dynamic is essential for interpreting valuation metrics in today’s evolving market environment.

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Footnotes

Disclosure

Marketing Communication

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State Street Global Advisors Worldwide Entities

State Street Global Advisors (SSGA) is now State Street Investment Management. Please go to statestreet.com/investment-management for more information.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

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The views expressed in this material are the views of Dane Smith and Saketh Reddy Moyilla Sai Shiva through the period ended August 7, 2025 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Investing involves risk including the risk of loss of principal.

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