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As companies like Tesla and Alphabet kicked off Big Tech's earnings season with a whimper, investors have two compelling reasons not to fret over the numbers from the mega-cap juggernauts this quarter.
The Bull Market's Rotation is Already Underway
• A major leadership rotation has been playing out successfully under the surface
• Money is violently shifting away from the 7 largest U.S. stocks (FAAMNGMT)
• Into smaller caps, cyclicals, real estate, banks and the Russell 2000
• June saw Russell 2000's worst month vs Nasdaq in over a year
• But July is already tracking Russell's best relative performance since 2016
Broader Market's Earnings Are Finally Catching Up
• Excluding the mega-caps, S&P 493 earnings are turning positive
• After 5 straight quarters of flat/falling profits for this group
• As megacap earnings momentum is expected to slow again
• Talk about an ideal changing of the leadership guard!
The Rotation Reduces Concentration Risk
• Over $1.25 trillion in market cap was shed from just 7 mega-cap stocks in 7 sessions
- An 8% price drop for that group vs just 2% for the S&P 500
• Seamless shift shows underlying bull's resilience
• Allows investors to diversify away from concentrated mega-cap exposure
• Tap into the multiple drivers across market caps and sectors
The Outlook: A Healthier, Well-Rounded Bull
• BofA sees the narrowing profit gap catalyzing broader market participation
• With mega-caps no longer delivering outsized growth
• The bull market rally has a sturdier foundation to stand on
• Investors should balance exposure across newly emerging leaders
• While maintaining some mega-cap tech as those giants can reassert dominance
The fading earnings momentum from just a handful of mega-cap tech stocks may seem unsettling on the surface. But smart investors will capitalize on the opportunity to diversify portfolios and ride the rotation of returns into new sectors and smaller companies. This passing of the baton is ultimately creating a healthier, more well-rounded bull market - one with multiple lanes of upside instead of a handful of crowded mega-cap drivers. Embrace the changing landscape while maintaining a balanced approach.
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