A MAJOR shift has taken place in the markets.
Ever since this current bull market began in late 2023, the MAG-7 have led stocks to the upside. Indeed, their outperformance has been so dramatic that many analysts have claimed the market is being held up by just seven stocks. You can see this clearly in the below chart comparing the performance of the MAG-7 ETF (MAGS) to that of an equal-weighted S&P 500 (a version of the index in which big tech is not heavily weighted).
However, this situation is now changing with the other 493 stocks that make up the S&P 500 outperforming the MAG-7 by a wide margin. The ratio between the Ex-Mag-7 ETF (XMAG) and the MAG-7 ETF (MAGS) has broken out of a long-term falling wedge formation (blue lines in the chart below). It has since formed a rounded bottom (purple line) and has broken out above critical resistance (red line).
This has raised the question… is the AI trade dead? After all, thus far the bulk of the market gains from AI have come from Big Tech/ Mag-7 stocks that are building out the AI networks.
The answer is… not at all.
The reality is that while everyone talks about AI, few companies have actually introduced it to their operations. BoAML has noted that only 15% of large companies have introduced AI. And smaller companies have been even more reticent to try the technology: only 7% of small companies have introduced AI.
When we consider this… the AI trade is NOT dead, it’s just shifting as the other 493 companies in the S&P 500 begin introducing the tech to their operations. Put another way, it’s time for the rest of the market to play “catch up” to Big Tech. And since many of these companies are small-cap in nature… it’s very possible the BIGGEST gains are yet to come.
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Best Regards
Graham Summers, MBA
Chief Market Strategist
Phoenix Capital Research
