Why Large-Cap Stocks typically outperform as year-end approaches

Seasonal trends suggest that large-cap equities tend to outperform smaller companies as the calendar year draws to a close, according to Mark Hulbert. This pattern holds even when accounting for current headwinds such as rising interest rates and heightened economic uncertainty, both of which historically weigh on the small-cap sector.

Data spanning more than a century indicates that while small-cap stocks often lead in January, their relative strength gradually fades throughout the year, turning negative by the fourth quarter. The consistency of this trend across the latter half of the dataset reinforces its statistical validity.

Research by Lucy Ackert of Kennesaw State University and George Athanassakos of the University of Western Ontario attributes this phenomenon to compensation structures. Many fund managers receive year-end bonuses if they beat the S&P 500 benchmark. As the fourth quarter nears, managers who are ahead of the index may shift holdings from risky small caps to the large-cap stocks that dominate the benchmark, thereby locking in relative gains.

Ackert noted that despite geopolitical tensions and inflation concerns, she expects the drive for window dressing to remain strong, supporting continued upward momentum in large-cap valuations through December.

Investors seeking to capitalize on this trend can consider exchange-traded funds focused on the largest U.S. companies, such as the State Street SPDR S&P 500 ETF Trust or the iShares Russell Top 200 ETF. For those preferring individual stocks, Hulbert’s ratings identified several S&P 500 components with market caps exceeding $100 billion that are recommended by at least two tracked newsletters.

Top picks by market capitalization include Nvidia ($5,315 billion), Apple ($4,622 billion), Alphabet ($4,002 billion), and Microsoft ($3,626 billion). Other notable mentions include Amazon.com, Broadcom, Meta Platforms, JPMorgan Chase, Bank of America, and Lockheed Martin. The full list, sourced from LSEG and Hulbert Ratings, encompasses major firms across technology, finance, healthcare, and energy sectors.