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The word “AI” is not thrown around like it used to be.
This year's stock market rally has been driven by big tech companies, riding the rise of AI from the cold afterglow of cost-cutting layoffs.
But the megacap stocks that led the way won't be what will propel the S&P 500 into its next rally. Analysts say the other 493 companies have much lower valuations but are likely to outperform without the baggage of inflated valuations or the pain of a post-AI crash.
Opportunities in value stocks, cyclical stocks, and recessionary industries lie in the S&P's weighting.
The market capitalization of Magnificent Seven stocks, Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), NVIDIA (NVDA), Tesla (TSLA), and Meta (META) are based on market capitalization. This accounts for 28% of the total amount. Highlights how top-heavy the index has become.
The S&P 500 is now essentially a high school basketball team, with a few 6-foot players and a lot of 5-foot-3 players. Stocks that have not yet reached a growth spurt are well-positioned to compete for the top growth player spot.
As tech stocks fell, so did the index. September was the S&P's worst performance this year. But as my colleague Josh Schaefer has reported, these losses have spurred small-cap stocks to flourish, with a healthier distribution across the market rather than concentrated in a few stocks. Profits may expand.
Still, analysts think small and medium-sized companies will eventually take the lead on Wall Street, but it's less clear when that rotation will arrive. Unlike that basketball team, there is no guarantee of rapid growth, and there can be multiple stocks in one stock.
Liz Young, head of investment strategy at SoFi, thinks a shift toward small-cap stocks may be underway, but doesn't see further gains for the S&P 500 on the “imminent horizon.” said. She believes Big Tech and broader S&P valuations still have to fall before the slowdown starts a new economic cycle and a new set of stocks that record the biggest gains. .
Although they don't expect the economy to slow, some say small-cap stocks could still lead the market.
Bank of America's research team, for example, pushed back on its call for a recession in early August, pushing back against the prevailing and lingering narrative of an impending recession. Savita Subramanian's equity strategy team expects the S&P to rise to 4,600 by the end of the year.
This was a 7% increase from the benchmark index's September closing price. However, although analysts disagree on the timing, some believe that mega-cap stocks may be put on the backburner.
Bank of America's team is “most confident” that an equal-weighted S&P 500 index, which removes the market capitalization weighting of stocks, will outperform the standard S&P 500 index and its large bias toward the Magnificent Seven. He pointed out that “judgments” still remain.
“We think cyclical stocks are the next stage where this market could actually exist,” Oson Kwon, equity and quantitative strategist at Bank of America, told Yahoo Finance. Ta. “It’s basically the exact opposite of what worked earlier this year.”
Hamza Shaban is a reporter for Yahoo Finance, covering markets and economics. Follow Hamza on Twitter @hshaban.
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