Is This the End of Tech's Market Domination?

Market Insights: Are We Witnessing a Changing of the Guard?
For the past two years, the Magnificent Seven—Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla—have captivated investors, driving consecutive 20%+ annual returns in the S&P 500 and shaping overall market sentiment.

Yet, as we move deeper into 2025, early signs suggest the market may be undergoing a significant shift. Small-cap stocks are showing signs of life. Value stocks are making a case for leadership. And for the first time in years, US mega-cap tech is lagging behind broader equity benchmarks.

Are we witnessing a changing of the guard in financial markets?

The Magnificent Seven’s Grip on the Market is Loosening
The Magnificent Seven’s dominance in the market is well documented. Collectively, these stocks made up 33% of the S&P 500’s market capitalization by the end of 2024 and accounted for over 50% of the index’s gains that year. Nvidia alone saw a staggering 240% return in 2023, while the group averaged a 63% gain in 2024.

But so far in 2025, the script has flipped.

For the first time since 2022, the Magnificent Seven reported no positive sales surprises, as seen in the chart below. Nvidia has yet to report (scheduled for Feb. 26), but the early results suggest that the group’s earnings momentum may be fading.
Analysts are expressing concerns about the Magnificent Seven’s escalating capital expenditures (capex), particularly in AI investments. In 2024, these tech giants collectively increased their capex by 63%, reaching $246 billion, with projections to surpass $320 billion in 2025.
According to Strategist David Kostin of Goldman Sachs, analysts expect the earnings growth advantage of the Magnificent Seven to shrink dramatically—from a 32% edge in 2024 to just 6% in 2025 and 4% in 2026.

Source: FactSet, Goldman Sachs Global Investment Research

These developments suggest that mega-cap tech may be losing its dominance as the primary driver of equity market gains.

Small-Cap Stocks: The Return of a Long-Lost Leader?
Small caps have historically been market leaders, delivering better returns over long horizons. From 1926 to 2007, small caps delivered a 2.5% annualized return advantage over large caps. However, since 2007, the trend has reversed—small caps have lagged by -3.4% per year, with microcaps faring even worse (-5.9%).

Source: Dan Rasmussen/Verdad Advisors

One reason for this underperformance has been an ongoing earnings recession in the small-cap space, but that could be about to change. Analysts estimate that:

Analysts project nearly 50% EPS growth for small caps through 2026.
With interest rate cuts anticipated later in 2025, financing conditions may improve for smaller companies, allowing them to potentially regain their historical edge over large caps.

If these projections hold, small caps could finally reclaim the leadership role they’ve historically held in equity market cycles.

Growth vs. Value: A Long-Awaited Rotation?
Over the past decade, growth stocks—led by technology—have dominated value stocks. But history suggests that leadership transitions do occur, and we may be in the early stages of one now.

Doug Ramsey of Leuthold Group notes in their February 2025 Green Book:

The price-to-earnings (P/E) premium for growth stocks relative to value stocks is near its highest levels since the dot-com bubble.
The short-term correlation between growth and value returns has recently turned negative, a dynamic that preceded previous leadership shifts in 2000 and 2020 (chart below).

Source: Leuthold Group

In previous transitions from growth to value dominance (2000-2007 and 2020-2023), market leadership shifted toward financials, industrials, and energy stocks—sectors that tend to thrive in rising rate or inflationary environments.

If the pattern holds, investors may want to consider tilting portfolios toward value stocks in the coming months.

Europe’s Unexpected Strength
For years, US stocks have trounced international equities. But European markets have quietly outperformed the S&P 500 to start 2025, raising the question of whether international diversification could finally start paying off (chart below).

Source: Zhitong Finance/Bloomberg as of February 6, 2025

Several tailwinds are boosting European stocks:

Lower valuations compared to US counterparts.
A diversified sector mix that is less dependent on technology.
A potential economic rebound supported by monetary policy shifts in the Eurozone.

Though US large caps still dominate global equity markets, investors may benefit from keeping an eye on European equities as an alternative source of returns.

Final Thoughts: A Changing Market Landscape?
After two years of narrow market leadership, 2025 may play out differently. The early months have raised several pressing questions:

Can small caps finally regain their historical outperformance?
Is value set to take over from growth?
Will US mega-cap tech continue to fade relative to the broader market?

Market leadership shifts take time, but long-term trends are never static. If we are indeed seeing a “changing of the guard,” portfolio allocations that worked in 2023-2024 may need to be revisited for the years ahead.

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