Investors see U.S. stocks rally broadening, even as ‘Magnificent Seven' rebound

Globe and Mail

30-05-2025

Megacap technology and growth stocks have retaken U.S. market leadership in recent weeks, but investors say that factors are in place that could allow a broader group of stocks to outperform for the rest of the year.
After technology shares led by a small group of stocks known as the 'Magnificent Seven' drove equity indexes higher in 2023 and 2024, much of Wall Street expected a broader swath of stocks to do better this year.
After stumbling in early 2025, the Magnificent Seven have stormed back amid an overall rebound in equities fueled by easing trade worries. The group, which includes Microsoft (MSFT-Q), Meta Platforms (META-Q) and Apple (AAPL-Q), has accounted for over 40 per cent of the S&P 500's total return since the close on April 8, when stocks began to recover from U.S. President Donald Trump's jarring April 2 'Liberation Day' tariff declaration, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The tech trade got a fresh boost on Thursday as shares of Nvidia (NVDA-Q), another Mag 7 company, gained 3 per cent after the AI chipmaker's sales beat quarterly expectations.
But investors say more enticing valuations and an improving earnings backdrop are poised to allow strong performance for a broader group of stocks, as long as the economy avoids significant hiccups in the coming months.
Coming into the year, 'we were pretty poised to see a broadening of market participation,' said Michael Reynolds, vice president of investment strategy at Glenmede.
'We think that's a story that's still relatively intact, that the rest of the market's earnings growth can actually be relatively competitive to some of these megacap tech companies and be supportive of returns through the rest of this year.'
The U.S. market has shown signs of broadening its gains. The top-performing S&P 500 sectors so far this year have been industrials, consumer staples, utilities and financials .
After lagging badly the prior two years, the equal-weight version of the S&P 500 -- which represents performance of the average index stock -- has performed more in line so far in 2025 with the standard S&P 500, which is market-cap weighted so the larger stocks influence it more.
More recently, however, the Mag 7 have outperformed as they did in 2023 and 2024 when they accounted for well over half the S&P 500'S 58-per-cent two-year return.
While the S&P 500 has gained over 18 per cent from its April lows, an ETF covering the Magnificent Seven -- which also includes Amazon (AMZN-Q), Alphabet (GOOGL-Q) and Tesla (TSLA-Q) -- has surged more than 30 per cent.
A strong first-quarter earnings season in general helped lift the stocks, which as a group had sold off particularly sharply earlier in the year over worries about the artificial intelligence business landscape, and economic fallout from Trump's sweeping tariffs.
Indeed, even as Nvidia reported another blockbuster quarter, the maker of AI chips did warn of more risks to its business emerging in the technology conflict between the U.S. and China.
With the rebound, valuations for the Magnificent Seven have also become more elevated. The group's median price-to-earnings ratio as of Wednesday was around 28 times earnings estimates for the next 12 months, after falling as low as 22.2 in April, according to LSEG Datatream. The S&P 500, including the Magnificent Seven, was at a P/E of 21.4.
Michael O'Rourke, chief market strategist at JonesTrading, said the megacap stocks have benefited recently as investors have been 'chasing exposure' to equities on better-than-expected tariff news by buying funds covering indexes such as the S&P 500, in which the stocks have heavy weightings, or by buying the stocks themselves.
'It's easier to just go for the index or go for the larger names in the index because they're liquid and you can quickly add exposure that way,' Mr. O'Rourke said.
However, he said, there are a lot of other large-cap names trading at 'much more attractive levels.'
'The headline-driven trading has to subside,' he said. 'When the market is less focused on trade and geopolitics, that will allow broadening to re-emerge.'
To catch up, the rest of the S&P 500 may have to close the earnings growth gap with the Mag 7.
In 2024, Magnificent Seven earnings grew 36.9 per cent against a 7-per-cent increase for the rest of the S&P 500, according to Tajinder Dhillon, senior research analyst at LSEG. This year, the gap is expected to narrow, with Mag-7 earnings rising 15.9 per cent against a 6.5-per-cent rise for the rest of the index.
'All the earnings growth was in those big Mag-7 names, and we have started to see a broadening in earnings growth,' said Chris Fasciano, chief market strategist at Commonwealth Financial Network.
Commonwealth is recommending investors diversify their equity exposure, including to the financials and industrials sectors, as well as to mid-cap stocks, Mr. Fasciano said.
Still, Mag 7 stocks could retain their popularity if Wall Street grows concerned about a significant economic slowdown, having become somewhat of a defensive play for investors in recent years. Their businesses are expected to be relatively resilient to the broader growth environment while investors are also drawn to their general financial strength.
Indeed, stable economic growth will be especially critical for economically sensitive areas such as industrials, materials and financial stocks.
'Better growth is going to be the trigger for a more sustainable broadening out and participation,' said Garrett Melson, portfolio strategist at Natixis Investment Managers.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.