Rising Price-to-Sales Ratios in Growth Stocks: Why Equal-Weight Indices Are Being Left Behind

The investment landscape has undergone a seismic shift in recent years, driven by a confluence of technological innovation, macroeconomic tailwinds, and investor behavior. At the heart of this transformation lies the meteoric rise in price-to-sales (P/S) ratios for growth stocks, particularly in the Information Technology and Communication Services sectors. As of January 2025, the S&P 500's P/S ratio stood at 2.84, a 25% increase from 2024 alonePrice-to-Sales Ratio By Industry (2025) - Eqvista^[1]. Meanwhile, the Information Technology sector, buoyed by AI-driven demand and cloud infrastructure expansion, traded at a forward P/S ratio of 8.4—nearly triple the market average15 stocks of companies set to grow sales twice as fast as the S&P 500...^[3]. This valuation premium reflects a structural reweighting of capital toward innovation-driven industries, leaving equal-weight indices increasingly out of sync with market realities.

Structural Shifts in Sector Valuation

The Information Technology sector's dominance is not an anomaly but a symptom of broader market dynamics. According to a report by Morningstar, the sector is projected to grow sales by 7.8% annually through 202715 stocks of companies set to grow sales twice as fast as the S&P 500...^[3], outpacing the S&P 500's expected 3.5% growth. This disparity has led to a compounding effect: as investors pour capital into high-growth tech stocks, their market capitalizations expand, further amplifying their influence on market-cap weighted indices. For example, Nvidia's 20% contribution to the S&P 500's gains in Q1–Q3 2024Charted: S&P 500 vs S&P 500 Equal Weight Index^[4] underscores how a single stock can skew index performance.

Communication Services, another high-growth sector, has similarly benefited from this trend. With a forward P/S ratio of 3.24Price-to-Sales Ratio By Industry (2025) - Eqvista^[1], it reflects investor optimism about streaming, 5G, and AI integration in media. However, equal-weight indices, which allocate 0.2% weight to each component regardless of size, dilute the impact of these leaders. This structural mismatch has created a valuation gap: the S&P 500's 31.6% allocation to Information TechnologyThe lesson from equal weight underperformance^[2] contrasts sharply with the equal-weight index's 13.9% exposure, limiting its ability to capture outsized returns from tech's ascent.

Investor Behavior and Index Divergence

The performance gap between market-cap and equal-weight indices has widened dramatically since 2023. From September 2023 to September 2024, the SPDR S&P 500 ETF (SPY) returned 92.9%, compared to 66.7% for the Invesco S&P 500 Equal Weight ETF (RSP)Charted: S&P 500 vs S&P 500 Equal Weight Index^[4]. This 26.2% divergence highlights the growing concentration of returns in the “Magnificent Seven” (Mag7) stocks, which accounted for 33.35% of the S&P 500's total weight as of September 2025Can Equal Weight Solve Our Concentration Crisis? Not So Fast…^[5].

Investor behavior has further entrenched this trend. As market strategists flagged overvaluation risks in large-cap tech stocks, many shifted toward equal-weight strategies to diversify exposurePrice-to-Sales Ratio By Industry (2025) - Eqvista^[1]. Yet, this shift has been short-lived. By early 2025, equal-weight indices faced renewed headwinds as momentum in the Mag7 stocks persisted. For instance, the S&P 500 Equal Weight Index underperformed its market-cap counterpart by 13.1% over the past two yearsThe lesson from equal weight underperformance^[2], a gap that widened as interest rates remained elevated and sector rotation stalled.

The Case for Caution

While equal-weight indices historically outperform over decades—delivering 63 basis points of annualized returns since 1990The lesson from equal weight underperformance^[2]—their short-term underperformance raises questions about their relevance in a concentrated market. The Russell 1000 Equal Weight Index's 71% average two-way turnover since 2000Can Equal Weight Solve Our Concentration Crisis? Not So Fast…^[5] also highlights the operational costs of frequent rebalancing, which can erode returns in a low-volatility environment dominated by a few leaders.

Moreover, equal-weight strategies face a paradox: they thrive when market breadth expands but falter when growth is concentrated. With the top 10 stocks now accounting for 33.35% of the S&P 500's weightCan Equal Weight Solve Our Concentration Crisis? Not So Fast…^[5], the conditions for equal-weight outperformance appear distant. Analysts caution that unless broader economic factors—such as a decline in interest rates or a surge in small-cap growth—trigger a rotation, equal-weight indices may remain on the sidelines15 stocks of companies set to grow sales twice as fast as the S&P 500...^[3].

Conclusion

The rising P/S ratios in growth stocks and the dominance of market-cap weighted indices signal a fundamental reweighting of capital toward innovation and scale. While equal-weight strategies offer long-term diversification benefits, their current underperformance reflects the market's preference for momentum and sector concentration. For investors, the choice between index types now hinges on a critical question: Should one bet on the continuation of a tech-driven rally or prepare for a broader market realignment? As the S&P 500's quarterly rebalances continue to amplify the influence of the Mag7, the answer may lie in a hybrid approach that balances exposure to growth leaders with tactical diversification.