The S&P 500 may be up 11% this year, but that doesn’t mean all of its stocks are performing well.
In fact, investors may be surprised to learn just how much weakness is lurking beneath the benchmark index’s surface.
According to Kevin Gordon, head of macro research at Charles Schwab, the average S&P 500 stock has experienced a maximum drawdown, or largest decline from its peak, of 27%. At the same time, more than half of the Nasdaq 100 components have fallen at least 20% from their highs.
So why is the S&P 500 still performing so well?
Much of the answer lies in the index’s heavy concentration in a handful of mega-cap technology companies. Because the index is capitalization-weighted, gains from its biggest components can mask losses elsewhere in the market.
Gordon recently sat down with TheStreet’s Caroline Woods to explain how investors can find opportunities beyond Big Tech, particularly in sectors such as energy, financials, industrials, materials, and healthcare.
His reasoning is that Big Tech’s earnings expectations have become unusually demanding, while economically sensitive sectors can still benefit from growth and artificial intelligence infrastructure spending.
Here’s why Gordon believes investors should look beyond the S&P 500’s headline performance — and what they should consider before buying the next dip in technology stocks.
How Big Tech stocks can mask weakness in the S&P 500
Since the S&P 500 is capitalization-weighted, a small group of mega-cap stocks can drive the index higher even while other components struggle.
According to Gordon, the 10 largest companies account for 40% of the S&P 500’s market capitalization. That concentration can create days when the index rises while much of the market falls, or vice versa.
The 10 largest companies make up 40% still of the S&P 500’s market cap.
Kevin Gordon, when asked whether a bear market could be hiding beneath a strong S&P 500
Gordon’s point isn’t that the S&P 500 is a bad investment. Rather, investors should understand where their returns are coming from and how much risk they may be taking on.
For example, Alphabet and Meta Platforms together account for more than 70% of the communication services sector, according to Gordon. Energy is also heavily concentrated, with its two largest companies accounting for more than half of the sector’s market cap.
BREAKING: The S&P 500 Equal-Weight Index outperformed the S&P 500 by +5.7 percentage points in October, its largest monthly outperformance since April 2009.This also marked its 2nd-largest monthly outperformance since the 1990s.The Equal-Weight Index surged +4.8% in October,… https://t.co/XJ6mRNBJeS pic.twitter.com/w8f8u1d7Y7— The Kobeissi Letter (@KobeissiLetter) November 1, 2026
Why an equal-weight S&P 500 fund can help diversify your portfolio
Unlike a traditional S&P 500 index fund, an equal-weight fund gives each company approximately the same weighting in the index instead of allocating a greater proportion to the biggest companies. This can help investors diversify their holdings by reducing the influence of a handful of mega-cap stocks.
Gordon notes the S&P 500 Equal Weight Index EWI had recovered to nearly its all-time high even as technology stocks came under pressure. In addition, financial stocks have been performing well, and small-cap stocks have also been rebounding, although he describes their recovery as having a defensive tilt.
For investors concerned about technology-related selloffs, Gordon believes equal-weighted sector exposure can help reduce the influence of a few dominant companies.
But there is a trade-off: when Big Tech stocks outperform the broader market, an equal-weighted fund will lag behind a traditional market-capitalization-weighted S&P 500 fund.
Why Big Tech stocks can fall even after beating earnings estimates
Gordon described the recent tech pullback as a needed reset rather than evidence that the artificial intelligence boom has run its course.
According to Gordon, forward earnings estimates for information technology have risen more than 90% year over year, an unprecedented increase.
Those elevated expectations leave little room for disappointment. Even when tech companies beat earnings estimates, their stock prices can fall if investors are concerned about future growth, revenue, or spending plans.
We’re basically living through the opposite, where the bar keeps getting raised and companies have been able to meet it, but some of the disappointment that you’re seeing in some of the stock price reactions is outside of things like just earnings.
Kevin Gordon, when asked whether technology fundamentals justify renewed momentum
That is particularly true for hyperscalers investing heavily in AI infrastructure.
Gordon notes that investors are paying close attention to capital expenditures, and any changes in those spending plans can trigger sharp stock-price reactions, even when earnings exceed expectations.
What to look for before buying the dip in tech stocks
Gordon believes market selloffs can create buying opportunities, particularly among higher-quality technology companies.
However, he cautions that higher long-term interest rates have made financing more expensive, creating a divide between profitable companies and lower-quality businesses that are struggling to generate earnings.
One metric Gordon favors is the interest coverage ratio, which measures how easily a company can pay interest on its debt using cash flow.
He also looks for revenue growth, earnings growth, and positive free cash flow, or the cash a company generates after paying its operating expenses and capital expenditures.
However, Gordon noted that free cash flow can be more complicated for hyperscalers. These companies may experience declining free cash flow because they are investing heavily in AI infrastructure, even as their revenue and earnings continue to grow.
For investors looking to buy technology stocks after a pullback, Gordon’s message is to focus on a company’s underlying financial strength rather than simply how far its stock price has fallen.
5 sectors Charles Schwab favors over technology stocks
While Charles Schwab maintains a neutral outlook on technology, the firm currently favors five other sectors: energy, financials, industrials, materials, and healthcare. Taken together, these investments can help diversify your portfolio beyond Big Tech.
Cyclical sectors, such as energy, financials, industrials, and materials, can benefit from continued economic growth.
Healthcare is traditionally considered a defensive sector, although Gordon believes it could also benefit from AI-driven improvements in efficiency and profit margins.
Industrials and materials may also benefit directly from the AI infrastructure boom, particularly as technology companies continue investing in data centers and related infrastructure.
However, Gordon cautions that the outlook depends on continued economic growth, a healthy labor market, and a Federal Reserve that raises rates gradually rather than aggressively. A significant slowdown in business investment, particularly AI infrastructure spending, could weaken both economic growth and employment.
The takeaway for S&P 500 investors
While investing in an S&P 500 index fund remains a popular way to gain exposure to some of America’s largest companies, much of the index is concentrated in a handful of mega-cap stocks.
Gordon believes there are opportunities beyond the Big Tech S&P 500 leaders, particularly in sectors that could benefit from continued economic growth, rising interest rates, and AI infrastructure spending.
For investors who want to reduce their exposure to mega-cap technology stocks without abandoning them entirely, an equal-weight S&P 500 fund may be worth considering.
And for those looking to buy the dip in technology stocks, Gordon emphasizes the importance of focusing on quality companies with strong earnings, revenue growth, and healthy balance sheets.
Ultimately, the message is straightforward: Don’t let the S&P 500’s headline performance tell the whole story. Understanding what’s happening beneath the surface can help you make more informed investment decisions.
Sources
Kevin Gordon on Street Talk · watch the full segment
Cited segments:
The 10 largest companies make up 40% of S&P 500 market capitalization. (7:51–9:02)
Information technology forward earnings estimates were up more than 90% year over year. (2:06–3:00)
Gordon uses interest coverage, revenue growth, earnings growth, and free cash flow as quality considerations. (4:11–5:11)
Charles Schwab favors energy, financials, industrials, materials, and healthcare. (10:08–11:02)
Rising earnings, guidance, and capital-expenditure expectations can make tech shares fragile despite earnings beats. (21:14–22:13)
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