Megacap Stumble: How the S&P 500's Top 10 Are Dragging the Index Down

Why the S&P 500's Ten Biggest Stocks Are Holding the Index Back

The S&P 500's ten largest companies have started to lag the rest of the index, and because those stocks carry so much weight in the benchmark, their weakness is holding the entire market back. RBC strategist Lori Calvasina flagged the shift in a new note, pointing to the underperformance of Apple, Nvidia, Amazon, Broadcom, both classes of Alphabet stock, Micron, Meta, Microsoft and Tesla relative to the other 490 stocks in the index.

The immediate cause is a change in investor mood toward artificial intelligence. For months, megacap tech led the market higher on the promise of AI-driven growth. Now, mounting skepticism about how quickly those AI investments will translate into returns has triggered rotation out of the group. Nvidia, until recently the market's leader, is down about 13% from its all-time high, while Tesla has fallen 26%. Amazon, Alphabet and Google are also in double-digit declines from their peaks.

Recent earnings from Meta and SpaceX added to the unease. Both companies reported negative free cash flow while outlining aggressive AI spending plans — a combination that raises the question of when, not whether, the spending pays off. Meanwhile, rising oil prices and portfolio de-risking ahead of November's midterm elections have kept institutional investors in a wait-and-see posture rather than chasing stocks near record levels.

The result is a market that has drifted with a downward bias for months. Strategists are responding: Calvasina remains on the sidelines on tech after downgrading it to Market Weight earlier this month, and HSBC's Max Kettner said he is moving to the sidelines near term after running maximum overweight stocks and maximum underweight sovereign bonds since mid-March.

Inside the Megacap Rotation: AI Payback Doubts, Oil and Midterm Caution

Why the Top 10 Matter More Than Their Own Returns

The ten largest S&P 500 stocks are not just big companies — they are the index's center of gravity. When they rise, they lift the benchmark almost mechanically; when they stall, the other 490 stocks have to work harder just to keep the index flat. That is the dynamic Calvasina is describing: the top 10 have started to falter relative to the rest of the market, and their weight is transmitting that weakness to the broader index.

The AI ROI Question Is Now the Market's Central Debate

The rotation is not random. It reflects a specific shift in how investors are pricing AI. Earlier in the cycle, AI spending was treated as a call option on future growth — the more a company spent, the better. Now, with Meta and SpaceX reporting negative free cash flow alongside aggressive AI spending plans, the market is asking for evidence of payback. That is a harder test, and it explains why the former leaders are the ones taking the hit. Nvidia's 13% pullback and Tesla's 26% decline are the visible symptoms of that repricing.

What HSBC's Kettner Is Really Saying

Kettner's note is notable less for its stock call than for its framing. HSBC had been maximum overweight stocks and maximum underweight sovereign bonds since mid-March — a high-conviction positioning. His admission that 'we just can't have the same level of conviction any longer' signals that the uncertainty is not about any single data point but about the number of competing narratives: AI regulation risk under a possible 'Blue Wave' in the midterms, renewed Middle East geopolitical concerns, and rising oil prices. When a strategist with that positioning steps back, it tells you the risk-reward has become less asymmetric.

Winners and Losers Inside the Rotation

The clearest winners in this rotation are the non-megacap parts of the market — the other 490 S&P 500 stocks that have been outperforming the top 10. If the rotation continues, equal-weight strategies and sectors outside megacap tech stand to benefit. The clearest losers are the megacap names themselves, particularly those with the most aggressive AI spending and the least near-term cash flow to show for it. For context, this pattern — leadership narrowing, then the leaders faltering — has historically been a late-cycle signal, though the article does not make that claim and the current situation may resolve differently if AI monetization accelerates.

What to Watch Into November

The midterm elections are the near-term pivot point. Kettner explicitly links the wait-and-see posture to the midterms, flagging the possibility of AI regulation under a 'Blue Wave' as a specific concern. That means the market's next directional move may depend less on earnings than on the political outcome and its implications for tech regulation. Oil prices and Middle East developments are the other variables strategists are watching.

What the Megacap Stumble Means for Portfolios Into November

The single most important insight: the S&P 500's top 10 stocks have shifted from market engine to market drag, and the trigger is a repricing of AI spending against a timeline investors no longer trust.

For investors and portfolio managers, the practical implications are specific:

• Reassess megacap tech exposure against the AI ROI timeline. Nvidia is down 13% and Tesla 26% from highs; Meta and SpaceX reported negative free cash flow with aggressive AI spending plans. The question is no longer whether these companies are spending on AI, but when the spending converts to cash flow.
• Note the strategist positioning. RBC's Calvasina is on the sidelines on tech after a Market Weight downgrade; HSBC's Kettner is moving to the sidelines near term after maximum overweight stocks since mid-March. When high-conviction strategists step back, it signals reduced asymmetry.
• Watch the November midterms as a specific catalyst. Kettner flags AI regulation risk under a possible 'Blue Wave' — a political outcome that could directly affect the megacap tech names that dominate the index.
• Track oil prices and Middle East developments. Both are cited as reasons institutional investors are de-risking rather than chasing stocks near highs.

Metrics worth watching: Nvidia's and Tesla's distance from their highs (currently 13% and 26%), whether Meta and SpaceX show improving free cash flow in their next reports, and any shift in strategist ratings on tech from Market Weight back to Overweight.