The Great Rotation: Why the "Mag 7" Stranglehold is Breaking

Introduction It’s time to talk about the Big Picture.  As most of you will know, I have been focused on the rotation for a while. In recent years, most investors seemed to believe that the only opportunities were in the Magnificent Seven, FANG+, or whatever you want to call these companies. They were right, to some extent, as the past few years saw very subdued cyclical growth, a housing market that was stuck, poor consumer sentiment for lower and middle-class consumers, trade wars, and other problems.  However, in 2026, something changed. As we can see below, tech isn’t leading this year. We’re seeing double-digit returns in value-focused areas, including energy, which “everyone” seemed to hate in recent years (I disagreed, but I certainly understood the frustration).  [Inline image] Source: State Street Heck, energy is up roughly 20.0% in the first 1.5 months of this year.  Even better, as we are getting close to the end of the 4Q25 earnings season, the narrative that Mag-7s are the only place to find good growth is weakening even further. What we are witnessing is a substantial turnaround in both sentiment and fundamentals.  This tweet sums it up quite well: [Inline image] Source: X/@davevermilion Even on an outright basis, value is performing better than growth: [Inline image] Source: Bloomberg Hence, in this article, I’ll discuss the durability of the rotation and what this could potentially mean for you.  The End of the "Growth Scarcity" Era As I already mentioned, I am not a “tech hater.” I am NOT making the case that Big Tech is toast and should be avoided at all costs. After all, many of you may have seen Adam’s articles that included valuations on NVIDIA (NVDA) and other stocks. I would not bet against NVDA with my enemy’s money. I also believe it’s a critical stock for the Trump Administration to keep the market strong heading into the midterms.  My point is that the “old economy” is making a comeback after a few tough years: But market concentration isn’t primarily about share-price valuations; rather, it’s been driven by unbalanced earnings growth. Since the end of 2022, the largest 10 companies in the S&P 500 have accounted for about two-thirds of the index’s overall EPS growth. During the dot-com bubble, they accounted for around one-quarter, according to Capital Economics. - Bloomberg [Inline image] Source: LSEG Data & Analytics, Capital Economics Currently, we’re seeing the best earnings growth in four years, as the S&P 500’s earnings are up by 14.5%. The best thing is that this is no longer a top-heavy number. In 3Q25, just six sectors saw positive growth. Now, that’s eight out of eleven sectors. And, even better, roughly half of the reporting companies are growing at double-digit rates.  For the entire market, that’s bullish, as it easily supports the 22 forward multiple the S&P 500 currently trades at. JPMorgan even sees accelerating EPS growth through at least 2027. [Inline image] Source: JPMorgan And that’s still not everything. When we erase NVIDIA from the data, which massively skewed the numbers due to astronomical growth, the S&P 500 blended earnings growth shifts from 17.7% to 12.0%. This shows that we don’t need NVIDIA anymore to make the case that growth is, in fact, in a good spot.  And, for stock pickers like myself, we also don’t have to buy Big Tech anymore, as growth is now found in industrials, financials, consumer cyclicals, and even consumer staples are getting some love (most likely because AI isn’t disrupting your favorite snack from PepsiCo (PEP)).  The Macro Green Light: Solving the "Maturity Wall" So far, so good.  While earnings (and future growth expectations like the ISM Index rebound) provide the fuel for this rotation, interest rates provide the friction. This has been the biggest hurdle for small caps (represented by the Russell 2000), which have been trading at