To The Moon

The Great Market Rotation: Will the "Magnificent Seven" Be Dethroned?

For years, the US stock market has been dominated by a powerful group known as the "Magnificent Seven". But a convergence of recent indicators suggests that this era of market leadership by a select few may be coming to an end. A major market rotation is underway, with capital shifting from these mega-cap companies to the other 493 stocks in the $S&P 500(.SPX)$   that have long been overlooked. This fundamental shift isn't by chance—it's driven by a variety of factors, including converging earnings growth, improving market breadth, and new macroeconomic catalysts. While the fundamentals of the "Magnificent Seven" remain solid, a healthier, more diverse market landscape is emerging, presenting new opportunities for investors who are looking beyond just a handful of stocks.

Market Concentration at a Peak: History's Warning

The current concentration in the US stock market has reached its highest level in over half a century, raising concerns among investors about single-point risk. The top 10 companies in the S&P 500 now account for nearly 40% of the index's weight, far surpassing the 26% peak seen during the dot-com bubble in 2000.

This concentration is particularly evident in the valuation gap. While it has narrowed somewhat, the valuation difference between the "Mag7" and the rest of the index remains significantly higher than historical averages.

However, history offers a mirror. As noted by investment consultancy Evelyn Partners, the "Magnificent Seven's" extraordinary growth has masked growing internal divergence. For instance, $Tesla Motors(TSLA)$   has underperformed in recent months. This difference in internal performance suggests that treating the entire group as a single, invincible entity may no longer be wise. More importantly, historical lessons show that after market concentration reaches extreme levels, a long period of "mean reversion" often follows, with former leaders giving way to the rest of the market. During the 2000 tech bubble, for example, three of the top 10 companies by market cap went on to post negative returns over the next 24 years, while only Microsoft outperformed the $S&P 500 Index (.SPX.US)$ . This reveals a thought-provoking pattern: a decade of relative underperformance for former leaders.

Converging Earnings Growth: A Fundamental Shift

Bloomberg analysts believe that the narrowing earnings gap between the "Mag7" and other $S&P 500 Index (.SPX.US)$ components may be prompting a rotation of capital into less-favored sectors. While the trade wars of 2025 highlighted the relative stability of mega-cap stocks, their valuations may be set to align with the rest of the market. The "Mag7"— $Apple (AAPL.US)$ , $Microsoft (MSFT.US)$ , $Alphabet-C (GOOG.US)$ , $Amazon (AMZN.US)$ , $Meta Platforms (META.US)$ , $NVIDIA (NVDA.US)$ , and $Tesla (TSLA.US)$ —saw their earnings growth surpass other components starting in Q2 2023, but their earnings per share (EPS) growth continues to decelerate.

This trend is expected to continue. According to analyst forecasts from FactSet, the EPS growth gap between the two groups could "fully close" by early Q1 2026. This isn't just a slowdown in growth, but also a reduction in positive earnings surprises.

Improving Market Breadth: A Technical Confirmation

Technical indicators are confirming the rotation trend revealed by the fundamentals. Market breadth, a measure of how many stocks are participating in an advance, is improving significantly. According to a Charles Schwab analysis, as of late August 2025, over 64% of $S&P 500 Index (.SPX.US)$ components were trading above their 200-day moving average. This is a vast improvement from the mere 35% level seen during the 2000 tech bubble. This "healthier" market breadth is a key differentiator between the current environment and historical bubble periods, suggesting that the market's rally has a more solid foundation.

The most compelling technical signal is the strong performance of the S&P 500 Equal Weight Index. This index gives its 500 components the same weight, automatically favoring small- and mid-cap stocks while underweighting mega-caps. Charles Schwab analysts note that the index's trend "looks much stronger than the market-cap weighted index," having recently broken above its December high to hit an all-time high. This performance is a direct technical reflection of capital shifting from tech stocks to cyclical sectors.

Emerging Catalysts: From Macro to Micro

A more favorable macroeconomic environment for a broad market rotation is taking shape. The prospect of lower interest rates is a powerful catalyst for this shift. Lower borrowing costs encourage consumer spending and corporate expansion, which particularly benefits cyclical sectors—like financials, industrials, and consumer discretionary—that were overlooked during the era of high interest rates. Destiny Capital believes the Federal Reserve is currently "walking a tightrope" between fighting inflation and supporting the labor market, and any move toward the latter would be a significant boon for the broader market.

At the same time, the theme of artificial intelligence (AI) is penetrating the broader economy beyond just the mega-cap tech stocks. Analysts at JPMorgan Asset Management point out that AI is creating a "virtuous cycle" as higher productivity often leads to profit protection and sustained capital expenditures. This wave is now impacting industries like industrials and utilities, which are leveraging AI to improve efficiency and productivity. Nathan Sweeney, CIO at global investment firm Marlborough, also notes that AI's impact is now filtering into areas like industrials, utilities, and consumer goods, which supports a decrease in market concentration.

A New Landscape of Opportunity: Overlooked Sectors and Market Caps

As the market rotation becomes the dominant narrative, the landscape of investment opportunities is changing. Multiple analysts believe that new investment opportunities are emerging in some overlooked sectors and market cap segments during this rotation.

Charles Schwab analysts note that capital is rotating from the tech sector into cyclical sectors. This makes industries closely tied to the economic cycle the most obvious beneficiaries. For example, Morgan Stanley suggests that investors could consider sectors like financials, industrials, and energy. Research from Bookmap also indicates that in addition to cyclical sectors, investors should also look at defensive industries like utilities, healthcare, and consumer staples, as demand for these sectors remains stable regardless of economic conditions.

In terms of market cap, mid-cap stocks also offer compelling opportunities. Marlborough CIO Nathan Sweeney states that equal-weight index funds typically have a heavier tilt toward mid- and small-cap stocks, and these companies often experience disproportionate growth during periods of economic improvement and declining interest rates. He also believes that as AI's influence continues to permeate the broader economy, it will further decrease market concentration and support more diversified portfolios, including mid- and small-caps. Furthermore, historical data supports this view: while large-cap stocks have outperformed mid-caps over the past 10 to 15 years, mid-caps have a strong historical record of outperforming large-caps over longer 20- and 30-year cycles.

This year, software stocks have also performed impressively, with most market capitalizations falling below $100 billion, positioning them as mid-tier players. Notably, $Snowflake (SNOW.US)$ , currently valued at $66.9 billion, reported earnings guidance that comprehensively exceeded expectations yesterday, with revenue growth of 30%, driving a 13% surge in its stock price post-earnings. Does such rare revenue growth hold greater appeal in the current market environment?

The Counter-Narrative: Reasons for Continued Dominance

A professional market analysis must consider all possibilities. While the evidence for a rotation is compelling, there are still strong arguments that could maintain the "Mag7’s" dominance.

First is their differing exposure to macro risks. Destiny Capital analysts point out that trade policies, such as new tariffs, could push up overall prices and squeeze the profit margins of many companies in the "S&P 493." In contrast, the "Mag7" are less affected due to their more diversified and relatively insulated businesses from global supply chain risks.

Second is their continued fundamental strength. The "Mag7" are not speculative startups from the dot-com bubble era. Analysts at FTSE Russell emphasize that they possess strong competitive advantages and solid fundamentals, including robust profitability, high returns on capital, and significant profit margins. Additionally, JPMorgan Asset Management notes that these companies are at the forefront of the AI revolution and continue to make massive capital expenditures to fuel future growth. Their immense scale and "human-first, AI-augmented" business models have created strong barriers to entry, making it likely they will maintain their leadership for the foreseeable future.

A Paradigm Shift Requiring Caution

From the convergence of earnings fundamentals and improving market breadth to the repetition of historical patterns, all evidence points to a clear conclusion: the era of market leadership by a few mega-cap companies is unsustainable. The "Great Market Rotation" is not just a prediction—it's a trend that is already underway. While the "Mag7" are not a speculative bubble of the past, their period of extraordinary outperformance may have ended, and their very success and extreme valuations have become a headwind for future returns.

In this new market landscape, market participants must adapt to this change. As Charles Schwab's Chief Investment Strategist Liz Ann Sonders once noted, the key to success during periods of high market concentration is to identify overlooked opportunities and move beyond the "herd mentality." Similarly, FTSE Russell reminds investors that in the current environment, diversification is more important than ever. A more balanced and healthy stock market is forming, and its success will no longer depend on just a few giants but on the strength and resilience of the broader economy.

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