The stock market’s surge this year has been largely driven by the biggest names in tech, known as the Magnificent Seven. However, analysts are now saying that the next leg of growth for the S&P 500 will come from smaller-cap stocks with lower valuations and higher potential to outperform.
The market caps of Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla, and Meta account for 28% of the index, highlighting how top-heavy the index has become. The remaining 493 companies have the opportunity to shine without the baggage of inflated valuations or the risk of a tumble after the AI run-up.
Many analysts believe that opportunities for value stocks, cyclicals, and beaten-down industries lie in the S&P’s weighting. As tech stocks slide, so does the index. In fact, the S&P suffered its worst performing month in September. However, this presents an opportunity for smaller-cap stocks to flourish and gain momentum.
Bank of America’s research team believes that the equal-weighted S&P 500, which strips out the market cap weighting of stocks, will outperform the standard S&P 500 index and its heavy skew towards the Magnificent Seven. They predict that cyclicals are the next leg of growth for the market, offering an alternative to what has been working so far this year.
While some analysts disagree over the timing of this rotation, there is a general consensus that the mega-cap stocks will take a back seat. The shift to smaller-cap stocks may already be underway, but a new business cycle with a new roster of names posting the biggest gains may be further down the road.
Ultimately, the market is unpredictable, and there are no guarantees of growth spurts. However, the potential for smaller-cap stocks to drive the market and outperform the top-heavy giants is an exciting prospect for investors. It remains to be seen exactly when and how this rotation will take place, but it is clear that there is a growing interest in finding value in lesser-known companies that have the potential to outperform in the future.
In conclusion, the stock market’s next leg of growth may come from smaller-cap stocks that have been overshadowed by the Magnificent Seven. With lower valuations and higher potential, these companies could offer attractive opportunities for investors looking to diversify their portfolios and capitalize on the evolving market landscape.