The S&P 500 Era May Be Ending? 2 Index Funds That Could Outperform Over the Next 5 Years

For most of the past decade, the S&P 500 was the undisputed king of the US equity market. Fuelled by the dominance of the technology sector and the extraordinary performance of a handful of megacap growth stocks, large cap investing delivered returns that left most alternatives in the dust. But market dynamics are beginning to shift in ways that have analysts reassessing where the real opportunity lies for the next five years.

The technology sector is already in negative territory for 2026, while value stocks, dividend payers, defensive equities, and smaller companies have started to outperform. Investors are growing increasingly concerned that AI related spending has ballooned well beyond what fundamentals can justify, and that the valuation premium attached to megacap growth names has become difficult to sustain. For portfolios still concentrated in S&P 500 or Nasdaq 100 index funds, analysts suggest it may be an important moment to consider diversification.

Two exchange traded funds in particular have attracted attention from market strategists as strong candidates to outperform the benchmark index over the coming years.

The first is the iShares Core S&P Small Cap ETF, which tracks the S&P 600 index. Small cap companies endured a prolonged period of earnings pressure, experiencing eleven consecutive quarters of year over year earnings decline between 2022 and early 2025. That trend has since reversed. The S&P 600 returned to positive earnings growth in mid 2025, and by late 2026, forecasts suggest it will actually deliver stronger earnings growth than the S&P 500. If that trajectory holds, small cap stocks would be offering better earnings momentum at a price to earnings ratio that is more than 30 percent cheaper than the large cap benchmark. Combined with an expense ratio of just 0.06 percent, this fund represents one of the most cost effective ways to access that potential upside.

The second option is the Vanguard Mid Cap ETF, which tracks the CRSP US Mid Cap Index, a diversified basket of roughly 300 companies occupying the space between small and large cap equities. Mid cap stocks share many of the same valuation advantages as small caps while offering a somewhat more stable earnings profile. The fund's sector composition is notably different from the S&P 500 as well. Industrials represent the largest weighting at around 20 percent, followed by consumer discretionary, financials, and technology at roughly 13 to 15 percent each. This structure produces a portfolio that is far less reliant on a narrow group of technology companies, which analysts see as a meaningful advantage given current market concentration risks. Its expense ratio of 0.03 percent makes it one of the cheapest options available in this segment.

The broader argument underpinning both recommendations is one of mean reversion and valuation discipline. The S&P 500's exceptional run in recent years was driven in large part by a concentration of capital in a small number of exceptionally highly valued companies. As AI sentiment becomes more complicated and investors begin rotating toward sectors with more reasonable valuations, the relative performance advantage of those megacap names is expected to diminish.

For long term investors, the message from analysts is not to abandon the S&P 500 entirely, but to consider whether a portfolio tilted toward smaller, more diversified, and more attractively priced equities might be better positioned for the landscape ahead. Both of these index funds offer accessible, low cost ways to make that adjustment.