The biggest trend of the last few years may be about to unravel.
Despite a rocky start to 2025, the stock market has helped make a lot of investors wealthier over the last few years. After climbing 24% in 2023, the S&P 500 (^GSPC 0.72%) followed up that performance with a 23% gain last year. In 2025, the benchmark index is down about 4% as of this writing. Still, that’s a cumulative gain of 47%.
However, the years 2023 and 2024 also witnessed increased concentration in stock performances. Just 28% of the components of the S&P 500 outperformed the index last year, and just 27% outperformed it in 2023. Those are the two lowest readings dating all the way back to 1980. If you didn’t have a lot invested in those stocks, your returns likely suffered.
But diversified investors might be getting some relief this year. After two years of intensifying concentration, the market is starting to broaden out. And one market indicator suggests that the trend could just be getting started.
Image source: Getty Images.
The U.S. money supply’s massive three-year reset
Believe it or not, the U.S. economy is still feeling the after-effects of the pandemic. As the economy shut down in 2020, the Federal Reserve acted to support growth as best it could. It slashed interest rates to near zero and held them there. Meanwhile, the U.S. government started sending out stimulus checks to citizens.
The result was a huge spike in the U.S. money supply — specifically, the measure of money supply known as M2. It’s a measure of all the cash people have on hand, the money deposited in checking and savings account, and other short-term investments like certificates of deposit (CDs) maturing within a year.
U.S. M2 money supply hit a peak in April of 2022. That’s a month after the Federal Reserve started raising interest rates to fight inflation. As rates climbed, M2 money supply fell. It continued to drop until late 2023, after the Fed indicated no further plans for rate hikes. The recovery has been slow as the Fed has been hesitant to cut rates too quickly and stoke further inflation.
US M2 Money Supply data by YCharts.
But as rates have come down slowly, the economy continues to chug along, M2 money supply finally reached a new all-time high in March, three years after the previous peak, with year-over-year M2 growth accelerating to 4.1%. That growth could continue through the rest of 2025, as the consensus calls for three more rate cuts from the Fed before the year is up.
How to invest as money supply reaches a new all-time high
When money supply grew tighter, companies with big piles of cash on their balance sheets and strong free cash flow held a significant advantage. They had plenty of money available to invest in growth and new technologies.
The advantage of the biggest tech companies in the world, most of which generate tens of billions in free cash flow every quarter, came to the fore, as artificial intelligence (AI) drove growth at the same time as money supply shrank. There were only a handful of companies capable of investing the capital necessary to take advantage of demand for AI.
However, as more cash comes into the economy, smaller businesses have greater access to capital, and investors may put more money to work in those opportunities. That’s why accelerating growth in money supply is historically correlated with broadening market performance.
We’ve already seen that start to happen in early 2025: 62% of S&P 500 components outperformed the index during the first quarter. However, big tech stocks that have outsize weight in the index were hit hard by several factors. So, it’s not necessarily the growing money supply that’s having the biggest effect in this case.
But going forward, investors should expect continued acceleration in money supply growth, which favors smaller components of the S&P 500. That makes an equal-weight S&P 500 index an attractive option for investors looking to put money to work. It invests equally among all 500 components of the index, which means when more than 50% of components outperform the index, the equal-weight index ends up performing better.
Investors can get easy access to the equal-weight index with the Invesco S&P 500 Equal Weight ETF (RSP 0.32%). The fund has a good track record of following the index closely and manages to avoid capital gains for shareholders.
I expect the equal-weight index fund to do well in 2025, but it’s also a good long-term bet. That’s because investors can reasonably expect smaller companies to grow faster than the biggest companies in the index due to the law of large numbers. Those maintaining a long-term mindset can benefit from buying and holding the Invesco exchange-traded fund.
Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
