Could U.S. stock market leadership finally broaden beyond the U.S. tech megacaps? Early signs from the third quarter earnings season – particularly 2026 outlooks – suggest there’s a good chance. The ‘Magnificent Seven’ – Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla – have long dominated the S&P 500, in terms of profits, market cap and price momentum.
But that grip may be loosening, at least a little.
Tajinder Dhillon, senior research analyst at LSEG Data & Analytics, estimates Mag 7 earnings growth for the third quarter will be 16.6 per cent, still comfortably outstripping the aggregate index’s expected 9.2 per cent. But that spread of 7.4 percentage points is the narrowest since the fourth quarter of 2022, nearly three years ago.
In a similar vein, Jeff Schulze, head of strategy at ClearBridge Investments, estimates that the earnings growth gap between the Mag 7 and the S&P 493 in this calendar year will shrink to 14 percentage points from 34 percentage points last year, before contracting even further next year to less than five percentage points.
Indeed, Schulze reckons the S&P 1000 index of small- and medium-cap stocks will post higher earnings growth than the Mag 7 next year, marking a remarkable turnaround from recent years.
“Should the Mag 7’s growth advantage dissipate, market leadership could rotate towards the less expensively priced laggards,” Schulze says, adding that third quarter results so far have been “encouraging” in this regard.
Schulze argues that incoming monetary and fiscal stimulus will benefit a broader mix of companies next year, with cyclical sectors like industrials and consumer discretionary particularly well positioned.
BlackRock analysts are also calling for the market’s laggards to start closing the gap with the megacap leaders, citing two other factors that could underpin broader earnings growth.
The first is the resilience of the U.S. economy. Many economists see GDP growth increasing to 2 per cent or higher next year. While BlackRock is only penciling in GDP growth of 1.5 per cent this year, that is still far from the recession many were calling for a few quarters ago.
Second, there’s AI-related spending. True, this may be a symptom of the AI optimism that has helped the Mag 7 sustain their dominance. But all that capex should also benefit the construction firms building the data centers, the energy companies powering them, and the industrial, equipment-making and materials firms supplying them.
According to LSEG’s Dhillon, materials and industrials should be the second- and third-top sectors, respectively, for earnings growth in 2026, just behind technology. LSEG estimates point to 20 per cent and 18 per cent growth for these two sectors, respectively, behind tech’s 22 per cent but comfortably above the predicted 14 per cent for the aggregate S&P 500.
Perhaps a market re-balancing may already be underway. The Dow Jones Industrial Average has outperformed the Nasdaq and S&P 500 over the past month. Granted, that’s a very short timeframe, and the Dow’s advantage is only one percentage point.
But the shift needs to start somewhere, and there’s certainly plenty of room for reallocation. The Nasdaq has doubled the Dow’s 20 per cent gains in the last six months. If U.S. economic growth remains healthy and earnings roll in as analysts expect, there’s every chance the performance gap will be narrowed.
However, there are plenty of reasons to doubt this rosy scenario, namely the creaking labour market, the looming impact of tariffs, and the U.S.-China trade war. And then there’s passive investing, momentum trading and the widespread ’buy-the-dip’ mentality that could help maintain the Mag 7’s advantage regardless of what’s happening on the ground.
But the market has been very top-heavy for a very long time. If other Big Tech firms’ results are as disappointing as those just released by Tesla and Netflix, the long-awaited broadening might finally arrive.
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