Large-cap stocks have been the clear leader in the 2024 stock market rally.

Bespoke Investment Group recently broke the S&P 500’s year-to-date performance (^GSPC) into 10 baskets of 50 stocks, organized by the size of their market capitalization value. The top decile of the 50 largest stocks in the index was the only subsector to have outperformed the broader S&P 500 this year.

To Bespoke, this shows the recent trend in markets has generally been “the smaller the stock, the weaker the returns.”

The move into large-cap stocks comes as investors have scaled back bets on interest rate cuts from the Federal Reserve this year amid sticky inflation reports.

The larger stocks have shown more resilience to higher interest rates in an environment where many expect rates to be held high for longer than initially expected.

That’s partly because large caps have continued to post robust earnings growth. In the first quarter, research from Deutsche Bank chief global strategist Binky Chadha showed earnings for a basket of stocks labeled “Mega-Cap Growth and Tech”, grew 39% compared with 5.9% year-over-year growth for the S&P 500. The megacap basket includes the “Magnificent Seven” tech stocks, among a few other big names like Netflix (NFLX), Visa (V), and Adobe (ADBE).

HANGZHOU, CHINA - JUNE 3, 2024 - The NVIDIA logo and the Apple logo are pictured in Hangzhou city, Zhejiang province, China, June 6, 2024. On June 5, Eastern time, Nvidia's stock market value exceeded $3 trillion, officially surpassing Apple's market value and becoming the world's second largest technology giant by market value. It is worth noting that in just over 3 months, Nvidia's market value soared from $2 trillion to $3 trillion. (Photo credit should read CFOTO/Future Publishing via Getty Images)

The NVIDIA logo and the Apple logo. (CFOTO/Future Publishing via Getty Images) (CFOTO via Getty Images)

This fundamental case has supported large caps when the outlook for interest rates and the trajectory for economic growth have become less certain. Meanwhile, small caps have continued to underperform no matter how interest rates move. Morgan Stanley chief investment officer Mike Wilson wrote in a weekly note to clients on Sunday night that this recent market action has him skeptical there will be a strong case for small-cap outperformance anytime soon.

“We view higher rates as a clear headwind to small caps, but we’re skeptical that lower rates offer a comparable benefit — a key reason we remain overweight large caps,” Wilson wrote.

He added, “The economy is still expanding and trailing S&P 500 earnings growth is finally reaccelerating again led by large cap, high quality stocks.”

The top-heavy AI trade

Bigger stocks are also winning the AI trade. Bespoke analyzed a group of AI ETFs to identify nearly 200 stocks that are frequently in indexes related to the AI trade.

The team found that within those indexes, stocks with a market cap over $1 trillion have returned a combined average of 41% this year, while those with market caps under $1 trillion have gained just 0.42% year to date.

Notably, Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA) are the only US stocks with market caps above $1 trillion.

“The early days of the AI boom were pretty broad, but recently it has been the mega-caps, driven primarily by NVIDIA (NVDA), that has been the only game in town,” Bespoke’s team wrote in its Monday note.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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