Why S&P 495 Signals Economy Better Than S&P 500

Have you ever stared at the stock market ticker, wondering if it’s really telling you the whole story? I’ve been there, squinting at the S&P 500’s dazzling highs, only to feel a nagging doubt about what’s beneath the surface. In 2025, the benchmark index is painting a rosy picture, but peel back the layers, and you’ll find a different narrative—one that’s less about tech giants and more about the broader economy. Let’s dive into why the so-called S&P 495—the index minus its biggest tech players—might be the real crystal ball for understanding where the economy is headed.

The S&P 500’s Shiny Facade

The S&P 500 has long been a go-to gauge for investors. It’s like the weather vane of the financial world, supposedly pointing to where the economic winds are blowing. But in 2025, something feels off. The index is hitting record highs, yet whispers of tariffs, inflation, and uneven corporate earnings are growing louder. So, what’s driving this disconnect? The answer lies in a handful of tech behemoths that are skewing the picture.

Names like Nvidia, Microsoft, and Meta Platforms have been riding an artificial intelligence wave, drawing massive investor bets. These companies, along with a few others, account for roughly a third of the S&P 500’s total market value. That’s a staggering concentration, unlike anything we’ve seen in decades. While their gains are impressive, they’re masking the struggles of the other 493 companies in the index. In my view, this lopsided dynamic makes the S&P 500 less reliable as a predictor of economic health.

Why the S&P 495 Matters

Enter the S&P 495, a term that’s gaining traction among savvy investors. By stripping out the seven largest tech stocks, you get a clearer view of the broader market—and, by extension, the economy. According to market strategists, this subset of the index is a better reflection of underlying economic conditions. Why? Because it’s less influenced by the AI frenzy and more tied to traditional sectors like retail, industrials, and consumer goods.

Focusing only on the top tech stocks is like judging a book by its cover—you miss the real story.

– A seasoned market strategist

Take retail giants like Walmart and Target, for example. Recent earnings reports show both companies grappling with rising tariff costs and sluggish sales. These firms, which import a significant portion of their goods, are feeling the pinch of global trade tensions. Their performance, along with that of other non-tech stocks, suggests a cautious outlook among consumers—hardly the bullish signal the S&P 500’s headline numbers imply.

Market Internals Tell a Different Tale

Digging deeper, the market internals—the underlying metrics of stock performance—reveal a less rosy picture. While the S&P 500 has climbed over 8% in 2025, the top seven stocks have surged by more than 14% on average. Meanwhile, the remaining 493 stocks are up just 5%. That’s a significant gap, and it’s not just about returns. A majority of S&P 500 stocks are trading below their 50-day moving average, a key momentum indicator, even as the index flirts with all-time highs.

• Average S&P 500 gain in 2025: Over 8%
• Top 7 stocks’ average gain: Over 14%
• Remaining 493 stocks’ average gain: Just 5%

This divergence suggests that the market’s strength is concentrated in a few names, while the broader index is treading water. In my experience, when the market’s internals look this uneven, it’s often a sign that investors are worried about the economy’s foundation. The S&P 495 becomes a more honest mirror of those concerns.

Is the Stock Market Still a Leading Indicator?

For decades, the stock market has been a leading economic indicator, often signaling shifts in the economy before they appear in data like GDP or unemployment rates. The Conference Board even includes the S&P 500 in its Leading Economic Index. But with tech giants dominating the index, some experts question whether it still serves this role. Perhaps the most intriguing aspect is how the market’s discounting mechanism—its ability to price in future expectations—has been distorted.

One trader recently noted that the market used to be driven by cyclical sectors like industrials and banks, which moved in lockstep with economic data. Today, it feels more like a bet on AI, momentum, and a few dominant themes. This shift raises a provocative question: Is the stock market still a market, or just a handful of stocks riding a wave of hype?

The market isn’t what it used to be—it’s more about a few big players than the economy as a whole.

– A veteran trader

I’ve always believed the stock market is a storytelling machine, weaving narratives about growth, risk, and opportunity. But when the story is dominated by a few characters, it’s hard to trust the plot. The S&P 495 offers a counter-narrative, one that’s grounded in the struggles and successes of the broader economy.

The Wealth Effect and Economic Momentum

Despite its flaws, the stock market still plays a pivotal role in shaping the economy. The wealth effect—where rising stock prices boost consumer confidence and spending—remains a powerful force. When the S&P 500 rallies, it can spark what economists call animal spirits, driving investment and growth. But if the rally is driven by just a few stocks, that effect may be less widespread.

Some analysts argue that the market’s rapid rebound in recent months has kept the economy from slipping into a recession. Without those gains, weaker economic indicators—like sluggish retail sales or rising unemployment—might have tipped the scales. But here’s the catch: if tech stocks falter, the wealth effect could reverse, wiping out billions in value and shaking consumer confidence.

The table above highlights the stark contrast between tech’s dominance and the broader market’s performance. It’s a reminder that the S&P 495 may be a better gauge for investors looking to understand the economy’s true pulse.

Small Caps and Sector Shifts

Another clue lies in the performance of small-cap stocks. The Russell 2000, a key index for smaller companies, has lagged the S&P 500 for most of 2025, gaining just 1.6% year-to-date. But in August, it’s outpaced the larger index, climbing 2.5% compared to the S&P 500’s modest 1% gain. This shift suggests investors may be starting to look beyond tech for opportunities.

Sectors like healthcare, energy, and real estate—often overshadowed by tech—have also shown signs of life recently. These areas are more sensitive to economic cycles, making their performance a valuable signal. If macroeconomic conditions improve, or if the Federal Reserve signals interest rate cuts, these sectors could get a significant boost, further highlighting the S&P 495’s relevance.

What’s Next for Investors?

So, where does this leave us? As someone who’s spent countless hours analyzing markets, I find the S&P 495’s story compelling. It’s like a whisper in a crowded room, cutting through the noise of tech’s dominance to reveal what’s really happening. For investors, this means rethinking how we use the stock market as a guide.

1. Diversify beyond tech: Look at sectors like healthcare or industrials for a more balanced portfolio.
2. Track market internals: Pay attention to metrics like the 50-day moving average to gauge momentum.
3. Monitor small caps: The Russell 2000’s performance can signal shifts in investor sentiment.
4. Stay alert for policy changes: Tariff hikes or interest rate cuts could reshape the market’s landscape.

The S&P 495 isn’t a perfect predictor, but it’s a more honest one. By focusing on the broader market, investors can better navigate the uncertainties of 2025, from trade tensions to inflation fears. The stock market is still a powerful tool, but it’s time we started listening to its quieter voices.

In the end, the stock market is a bit like a conversation—sometimes you have to tune out the loudest voices to hear what matters. The S&P 495 is speaking, and it’s telling us to look beyond the headlines. Are you ready to listen?