Prepare for the Rise of the Unparalleled Group 493!
The U.S. stock market could witness a significant shift, moving beyond the dominance of the "Magnificent 7" which accounted for 53% of the S&P 500's returns in 2024. This broadening is expected due to a combination of factors, including faster earnings growth among other large- and mid-cap stocks, the spreading of technological efficiencies, and a broadening of the artificial intelligence (AI) investment narrative.
According to Todd Ahlsten, Chief Investment Officer and Portfolio Manager at Parnassus Investments, the author of this article, the market is opening up opportunities to select stocks with potential for strong long-term returns. He focuses on businesses poised for growth and earnings positioned to accelerate.
One of the key indicators of this market shift is the relative earnings growth. While the Magnificent 7 continue to deliver strong earnings growth, the rest of the Nasdaq 100 has actually been growing earnings faster. For instance, in Q2 2025, the rest of the Nasdaq 100 is poised to grow earnings by approximately 16.9%, compared to the Magnificent 7's earnings growth of over 15% year-over-year.
Technological efficiencies pioneered by the Magnificent 7, such as big data usage and digital infrastructure investment, have increased productivity across many U.S. companies. Since March 2021, average underlying profits per worker have grown at an annualized rate of 8% across all US-listed companies. This productivity uplift could help more companies beyond the Magnificent 7 to compete and grow.
Moreover, the AI-driven investment theme, historically concentrated in the seven tech giants, is now broadening out to other companies within the Nasdaq 100 and beyond. This broadening narrative can attract capital flows into a more diverse array of firms benefiting from AI and technology adoption.
The author expects the broadening of the market to emerge in sectors such as industrials, financials, and healthcare. For instance, the industrials sector, specifically companies like Deere & Co. (DE) and Old Dominion Freight Lines (ODFL), are expected to recover from a period of contraction and capture upside as markets recover. Similarly, life sciences tools and services companies in the healthcare sector could see a recovery linked to increased biotech and pharmaceutical investments. Companies like Eli Lilly (LLY), Vertex (VRTX), and Intuitive Surgical (ISRG) are expected to see earnings continue to grow as the adoption of their new products increases.
In summary, factors that could lead to market broadening beyond the Magnificent 7 include:
- Stronger relative earnings growth in other large and mid-cap stocks.
- Productivity and profitability gains spreading across multiple U.S. companies due to tech adoption.
- Broadening of the AI investment theme beyond the mega-cap tech giants to other sectors and firms.
- Investor desire for diversification amid high concentration and valuation risks in the Magnificent 7.
These elements together can drive a more balanced market leadership profile across a wider number of stocks. The author's investment strategy involves selecting stocks that are not only growing their earnings, but also increasing their profit margin profiles, their returns on capital, and their total addressable markets by innovating.
The broadening of the U.S. stock market could potentially stimulate increased investing in technology sectors, as the AI-driven investment theme expands beyond the traditional dominance of the seven tech giants, potentially leading to capital flows into a more diverse array of firms benefiting from AI and technology adoption, such as those in the industrials, financials, and healthcare sectors.
Regulation plays a significant role in the finance industry, and the advancement of artificial intelligence could impact the way regulatory compliance is managed, potentially streamlining processes and reducing costs, making it crucial for firms to stay abreast of regulatory changes in this area.
