How to beat the S&P 500 with its own tools

S2N spotlight

As we are constantly being told the bulk of the value of the S&P 500 market cap index, the one we are used to investing in, is dominated by a few technology heavyweight stocks. You can see by the green ratio button how the market cap index has accelerated relative to the equal weighted S&P 500 index.

If you are concerned that we may be in a bubble or even just overvalued territory, and you are not quite ready to commit to selling your equities or going short, then I would say the next best alternative is to switch from SPX (S&P 500 Market Cap) to SPXEW (S&P 500 Equal Weight).

S2N observations

Really solid proof that the Shiller PE (or CAPE) i.e. 10 year trailing returns have a significant market timing effect on the next 10 years return in the markets.

From 1881-2025 you can see an r2 of 26% that is pretty significant. However, if you look at 1987-20215 with the violet colouring the r2 is 85% meaning that the PE ratio explains 86% of the future 10 years returns.

I have said it before and will say it again we are near record Shiller PE levels so the next 10 years are likely to be well below average. I know that is hard to accept given the strength of the current market, but there in lies the reason for the forecase.

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Silver and Platinum both had big 3 Z-Score up days.

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