The late-cycle economy is defined as the final phase of the macroeconomic cycle when economic activity hits its peak. The period is characterized by high but slowing growth, rising inflation that may affect profit generation, a tight labor market and volatility in interest rates.

Given these conditions, many market participants are considering how best to approach diversification to navigate an environment characterized by heightened market risk and uncertainty around future corporate profits and economic growth. With the S&P 500^® currently highly concentrated in a few sectors and stocks, addressing these challenges can involve a range of strategies—from broad asset allocation to more selective stock picking.

In this blog, we examine the S&P 500 Market Leaders Index as a potential strategic solution. Launched on Nov. 11, 2024, this index tracks leading companies within The 500^® as identified by their consistently high free cash flow margins, strong returns on invested capital and significant market share.

In 2025, The 500 recorded strong performance, driven by ongoing momentum. The S&P 500 Market Leaders Index also performed well compared to its benchmark. Over the long-term back-tested period, the S&P 500 Market Leaders Index delivered strong results, outperforming The 500 both in absolute terms and on a risk-adjusted basis (see Exhibit 1).

Additionally, the index has historically outperformed The 500 during most market downturns while showing lower volatility and a reduced downside capture ratio. This performance can be especially notable in the late stages of the economic cycle, when markets are more prone to stress events.

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Fundamentally, the S&P 500 Market Leaders Index is most similar to a traditional quality strategy—tracking constituents that tend to demonstrate higher margins, strong returns on capital and lower leverage (see Exhibit 2). The strategy’s significant emphasis on higher profitability may render it more defensive than other quality strategies because the most profitable stocks typically have a larger “margin of safety,” allowing them to withstand economic shocks or slowing growth while remaining profitable.

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The focus on high market share bolsters the index’s overall defensive characteristics, as companies with substantial market share typically benefit from competitive advantages that establish a defensive “moat” around their business models. Tangible benefits of a defensive moat may include pricing power (allowing higher cost inflation to be passed through to pricing), lower sourcing costs and the ability to leverage economies of scale or network effects to sustain revenue, thereby enabling companies to remain profitable throughout the business cycle.

Quality characteristics may resonate more in some sectors than others. Exhibit 3 shows that historically the highest overweight has been in the Information Technology and Consumer Staples sectors. However, the current weight in Financials is much higher than it has been historically, reducing the underweight in the sector.

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The S&P 500 Market Leaders Index includes 5 of the Magnificent 7 companies (it does not contain Amazon or Tesla). These companies are distributed across Information Technology, Consumer Services and Communication Services. The total weight of these constituents in the index is 22.7%, however the S&P 500 benchmark universe holds a 34.9% weight.

The S&P 500 Market Leaders Index’s strong outperformance in periods of economic stress is empirically demonstrated in the back-tested period, where the index outperformed The 500 across all macroeconomic environments—most significantly in falling growth environments.

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The S&P 500 Market Leaders Index may provide a source of diversification relative to the benchmark universe, potentially providing a framework for navigating late-cycle market conditions.

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