It’s Not Just the Mag 7 Driving Market Performance

Why Equity Investors are Actively Rotating Capital

A diversified portfolio of U.S. stocks has performed well over the past few years, but the ability to generate strong alpha has largely relied on being overweight by a few key names (most of which are in the “Magnificent Seven”).¹

But this has not been the case in 2026.

As I write, the S&P 500 Equal Weight Index is outperforming the market-cap weighted S&P 500 Index by approximately 200 basis points year-to-date, which sends a clear signal that investors have been rotating capital away from the hottest trade.

We know this because the traditional S&P 500 is market-cap weighted, which means the largest companies (mega-cap tech stocks) have the greatest influence on performance. The equal-weight version gives every company the same weight. When the equal-weight index outperforms, it suggests the average stock is doing better than the headline index may indicate.

Put simply, many of “the other 493 stocks” in the index are quietly experiencing solid, sometimes bigger gains. This is a healthy development, and I think the reason comes down to three forces: earnings strength, fading uncertainty, and more selectivity within the AI trade.

Let’s start with earnings.

According to our colleagues at Zacks Investment Research, aggregate earnings for the S&P 500 grew +40.9% year-over-year on +14.5% higher revenues. Positive surprises were also widespread, with 83.8% beating EPS estimates and 76.9% topping revenue estimates.

To be fair, some of the headline earnings strength is still being driven by a few very large companies. But the earnings story does not disappear when those companies are removed. As seen on the nearby chart, if we exclude Technology sector earnings and a few key earnings drivers in Q2, we still get around 15% year-over-year earnings growth—a strong improvement from previous years.

The same point shows up within the Technology sector. Zacks data shows that Q2 earnings growth in the Tech sector remains heavily concentrated in Nvidia, Micron, and Alphabet. Stripping out those three companies reduces Q2 earnings growth for the rest of the Tech sector from +95.2% to +33.7%. Quite a revision, but still very strong overall.

The second force, I think, is driving the broadening is fading uncertainty. Market leadership often narrows when uncertainty is high, as investors tend to crowd into the companies and themes with the clearest earnings visibility, strongest balance sheets, or most durable growth. Over the last few years, that has clearly been mega-cap Technology and AI-linked stocks.

But in 2026, several major risks have become easier for markets to process. The war and oil price volatility are of course still front-and-center, but investors have had six months to gauge the impact on energy prices and corporate earnings. Similarly, tariff policy has returned to headlines, but the market has moved beyond the initial shock phase and is now assessing company-by-company exposure. The Fed’s outlook on interest rates may be the remaining wild card, but I think if we’re talking about 25 basis points in either direction, it’s not enough to factor as a negative surprise.

The final force is more selectivity within the AI trade. In July, AI-linked areas like semiconductors, memory, power, liquid cooling, and optical networking all came under pressure. When a trade becomes more volatile, investors often look for ways to reduce concentration and find opportunities elsewhere. And indeed, in August, the rebound became more differentiated, with investors rewarding some parts of the AI ecosystem more than others. That type of selectivity is healthier than simply buying the entire theme indiscriminately.

It has also meant investors are increasingly looking for earnings growth in sectors that were written off earlier in the year—which is how rotation often works. Companies and sectors that were overlooked earlier in the year are getting a second look as fundamentals improve and the macro backdrop becomes easier to assess. In my view, that is an important shift. A rally led by a handful of mega-cap stocks can work for a while, but a rally supported by more companies, more sectors, and more earnings drivers tends to be a healthier market environment.

Bottom Line for Investors

The U.S. stock market has not completely moved past the concentration issue. But the rally is becoming broader, as equal-weight outperformance, strong earnings growth outside a few headline names, and more participation across sectors all suggest the market has more support beneath the surface than many investors may realize. For diversified investors, that is an encouraging signal. Diversification does not always feel valuable when leadership is narrow, but it becomes important when leadership changes—which is what we’ve seen in 2026 year-to-date.

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REFERENCED ARTICLES

1 Zacks.com. August 19, 2026. https://www.zacks.com/commentary/2977249/tech-energy-fuel-sp-500-growth-engine

2 Zacks.com. August 19, 2026. https://www.zacks.com/commentary/2977249/tech-energy-fuel-sp-500-growth-engine

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