Big Tech Takes A Back Seat After The AI Hype Cycle

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The word "AI" isn't what it used to be.

Big names in technology have driven the stock market higher this year, from the usual strike to cost-cutting and the rise of AI.

But the big stocks that paved the way won't propel the S&P 500 to its next rally. Those other 493 companies are undervalued but have the potential to outperform, analysts say, suffering from greater valuation burdens or the effects of the rise of AI.

Opportunities in value stocks, cyclicals and distressed sectors weigh on the S&P.

The market capitalization of the Magnificent Seven — Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Nvidia (NVDA), Tesla (TSLA), Meta (META) — is 28% of the index. Actions. This shows how high the rate is.

The S&P 500 is mostly high school basketball teams with a few 6-foot kids and a lot of 5-foot kids. Stocks that haven't experienced a dramatic rise have a good chance to compete for the title of Most Improved Player.

When tech stocks weaken, so does the index. The S&P experienced its worst month of the year in September. But the losses could boost small-cap stocks, as my colleague Josh Schaefer reports , with gains spread more healthily across the market than among a few concentrated groups.

But while analysts expect small-cap stocks to eventually take over on Wall Street, it's unclear when that turnaround will occur. Unlike a basketball team, there is no guarantee of growth, and stocks can have many growth spurts.

Liz Young, SoFi's chief investment strategist, believes there is a shift to small-cap stocks, but doesn't see further improvement on the S&P 500's "horizon" in the near term. He believes the big tech companies and the broader S&P valuations will have to fall further before prices begin to fall, sparking a new economic cycle in the new list of companies with the highest profits.

Others don't expect a slowdown, but still see opportunities for smaller stocks to take market leadership.

Bank of America's research team, for example, withdrew its recession report in early August because of the looming recession and the lingering narrative. Savita Subramanian's Equity Strategy Group expects the S&P to rise to 4,600 by the end of the year.

This represents a 7% increase from the benchmark index's closing price in September. But while analysts disagree on the timing, there is a sense that ultra-large-cap stocks will take a back seat.

Bank of America Group describes the "high confidence" equal-weighted S&P 500 Index, which does not weight stocks by market capitalization, the S&P 500 Index as the benchmark S&P 500 Index and has a strong performance bias. The Amazing Seven of the S&P 500 Index.

"We think cyclical is the next direction this market will go," Osung Kwon, equity and quantitative strategist at Bank of America, told Yahoo Finance. "Basically, it's the opposite of what was done at the beginning of the year."

Hamza Shaban is a Yahoo Finance reporter covering markets and economics. Follow Hamz on Twitter @hshaban .

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