As the new year approaches, a significant shift is occurring in market sentiment, signaling that the era dominated by technology giants may be drawing to a close. Prominent Wall Street strategists from firms such as Bank of America Corp. and Morgan Stanley are urging clients to explore lesser-known segments of the market, with a growing focus on sectors like health care, industrials, and energy, which are expected to outperform the well-established Magnificent Seven tech companies, including Nvidia Corp. and Amazon.com Inc.
Investors have long viewed Big Tech as a reliable investment strategy, thanks in large part to their robust balance sheets and substantial profits. However, there is a rising tide of skepticism regarding whether these tech behemoths can sustain their lofty valuations amidst increasing costs associated with advancements in artificial intelligence and other technologies. Recent earnings reports from industry leaders like Oracle Corp. and Broadcom Inc. have further fueled concerns, as they failed to meet heightened expectations.
The shift in focus comes as optimism about the broader U.S. economy begins to build. Analysts suggest that this momentum may compel investors to redirect capital toward sectors that have lagged in performance, steering away from megacap tech stocks. Craig Johnson, chief market technician at Piper Sandler & Co., remarked on the noticeable trend of investors withdrawing from the Magnificent Seven, indicating a collective desire to explore alternative investments.
Evidence of this change is already apparent. Since U.S. stocks reached a near-term low on November 20, the small-cap Russell 2000 Index has surged by 11%, whereas the Magnificent Seven companies have only managed to capture half of that gain. Additionally, the S&P 500 Equal Weight Index, which treats all components with equal weighting regardless of size, has outperformed its cap-weighted counterpart during this same period.
Strategas Asset Management LLC is among those advocating for a shift toward underperforming sectors such as financials and consumer discretionary stocks, anticipating a significant “sector rotation” for 2026. Jason De Sena Trennert, Chairman of Strategas, expressed confidence that small- and mid-cap stocks would see growth as the economy transitions into an “early-cycle backdrop.”
Meanwhile, Michael Wilson, chief U.S. equity strategist at Morgan Stanley, noted that while Big Tech might still fare adequately, it is likely to lag behind emerging sectors. He emphasized that this broadening market participation could be further bolstered by the anticipated economic recovery.
Bank of America’s Michael Hartnett echoed this sentiment, indicating a broader market shift away from Wall Street’s megacaps toward “Main Street” stocks, particularly mid caps, small caps, and micro caps. Veteran strategist Ed Yardeni has also recommended investors consider an underweight posture towards Big Tech, which he has favored for over a decade, suggesting that profit growth will be increasingly concentrated outside these tech giants.
Data from Goldman Sachs Group Inc. suggests that earnings growth for the remaining companies in the S&P 500—referred to as the S&P 493—is expected to accelerate, thereby reducing the earnings share of the top seven from 50% to 46%. Investors are urged to monitor the earnings performance of these broader companies before becoming more bullish.
As the Federal Reserve continues to navigate interest rate cuts, market sectors such as utilities, financials, health care, industrials, and energy have shown substantial gains this year, highlighting the early signs of this anticipated market broadening. Analysts believe this trend of diversification is likely to persist in the coming months, reinforcing the notion that opportunities may well exist beyond Silicon Valley’s realm.
