According to Bank of America market analysts, the dominance of Magnificent-7 stocks over the US market is coming to an end. “History would suggest there is more to go in cap-weighted dominance,” Bank of America’s head of US equity and quantitative strategy, Savita Subramanian, wrote in a note to clients. “But if the Fed’s next move is a rate cut, and if the Regime indicator is shifting to a Recovery, we think the run may be closer to done.”
The first few months of the year were concerning for the US stock market, especially mag-7 members. Companies like Apple (AAPL) and Tesla (TSLA) are still looking to rebound to 2024 highs. The biggest contributor to that decline was undoubtedly tariff threats. This allowed smaller stocks on the top indexes to catch up with the top US stocks, weakening the collective’s dominance on the market.
Subramanian’s team found that the largest 50 stocks in the S&P 500 (^GSPC) have outperformed the benchmark index by 73 percentage points since 2015. BofA noted that the last notable run of similar outperformance for the 50 largest stocks in the index came in the late 1990s, leading into the bursting of the dot-com bubble. Following the bust, the market saw a large shift from megacap growth, leading to value and small-cap stocks outperforming during the early 2000s.
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Therefore, Subramanian and the Bank of America analysts think a similar situation is about to happen to modern-day magnificent-7 stocks. “[Federal Reserve] easing has been accompanied by Mega caps lagging more than leading, and higher inflation should support a broadening of the S&P 500 beyond defensives/secular growth,” Subramanian wrote. The call would mark a massive shift in the dominant market narrative. Hence, smaller-cap stocks could become investor favorites, especially if they’ve shown loads of growth already this year.
Furthermore, crypto-based stocks are also challenging the magnificent-7 stocks, and could become a choice for investors to opt for against the mag-7. In the US, cryptocurrency, especially stablecoins, is square in the spotlight. So much to the point that several banking institutions are even investing in cryptocurrency as reserve options and launching their own stablecoins. Strategy (MSTR), a Michael Saylor-led tech company, has surged in value since adopting a pro-Bitcoin investment strategy. Further, stocks like Coinbase, Bullish, and more are on the rise as crypto assets hit new highs. This could be another blow against Magnificent-7 stocks.
