AI ‘fatigue’ leaves investors focused on S&P’s other 493 stocks

[NEW YORK] Bets on artificial intelligence companies have dominated US equity markets for three years, powering a 78 per cent gain. A growing number of investors are now wagering that run, led by the Magnificent Seven, is about to end.

Mounting concerns about AI’s ability to deliver seismic changes on the American economy – and the fat profits that would come with them – has turned investor euphoria about the technology into agita. That’s driving cash into shares of the “other” 493 companies, particularly ones that would benefit most if an expected uptick in economic growth comes about.

“I call it ‘AI fatigue,’” said Ed Yardeni, president and chief investment strategist at the eponymous Yardeni Research. “I’m tired of it and I suspect a lot of other people are sort of wary of the whole issue.”

The reversal would mark an end to one of the most dominant stretches in market history for such a concentrated swath of the market. Nvidia, Microsoft and Apple added trillions in market value since OpenAI’s ChatGPT captivated investors in 2022. Alphabet and Meta Platforms were hardly slouches, while second-order companies like Broadcom and Oracle got swept up in the exuberance.

The shift, however subtle, has been going on since the S&P 500’s late-October record gave way to a selloff in November. Bloomberg’s gauge for the Magnificent Seven has fallen 2 per cent through Monday’s close since Oct 29, while the S&P 493 has climbed 1.8 per cent.

The market saw a pullback from momentum names into more defensive and more reasonably priced sectors. The Defiance Large Cap Ex-Magnificent Seven ETF, which launched at the end of 2024, saw six-straight months of inflows to end last year, including a quadrupling in December from November’s level. The ETF, ticker XMAG, rose 15 per cent last year, with the bulk of the advance in the final six months.

The performance of the S&P 493 in 2025 was “impressive,” according to Yardeni. The strategist noted profit margins for the cohort remained elevated and did not “get squeezed” despite the establishment of the Department of Government Efficiency, President Donald Trump’s tariff agenda and signs of weakness in the labour market.

If the economy improves, so too will the prospects for cyclical and growth-orientated sectors, providing ample opportunity for investors looking to move on from the era of Big Tech dominance. Lenders like JPMorgan Chase and Bank of America are likely to make gains. Consumer discretionary stocks would benefit from rising confidence among shoppers, who will be more willing to purchase Nike sneakers or book vacations using Booking Holdings.

There are risks, though, as any end to the Magnificent Seven’s dominance would likely entail some turbulence on equity markets, going by history.

“The most benign outcome for the bull market would be a peaceful transfer of power to a broad coalition of the other 493 S&P 500 constituents,” said Doug Peta, chief US investment strategist at BCA Research. “That’s not how potent and highly concentrated bull markets typically evolve, however.”

Peta pointed to the demise of the Nifty Fifty in 1973 and the dot-com darlings in early 2000 as periods that warranted caution. Both times, the broader market retreated when its long-time leaders stumbled. 

Peta thinks the AI trade has further to run, though, despite worries that capital spending is unsustainable and valuations have become stretched. At the same time, AI investors have become more discerning. What had been a monolithic trade, where any company remotely associated with AI went up, has now splintered, with former AI darlings like Oracle suffering steep losses. 

“It is not my view that the end of the Magnificent Seven’s reign is at hand – I will be surprised if they don’t make a final surge higher to cap their run – but once it does arrive, it’s most likely that new leadership will not emerge until US equities suffer a meaningful bear market,” said Peta.

Yardeni is more pessimistic about the AI trade, suggesting the fatigue started with a cryptic warning from Michael Burry, the money manager made famous in The Big Short, in late October. Burry followed that up with the disclosure of bearish wagers on Nvidia and Palantir Technologies.

Other firms have also warned that the Big Tech dominance could soon end. When Wall Street strategists set out their expectations for 2026, one theme was that the Magnificent Seven’s time at the top was coming to an end. Last month, Goldman Sachs strategists said that they expect the Magnificent Seven to contribute 46 per cent to the earnings growth of the S&P 500 in 2026. This is down from the 50 per cent contribution made in 2025. Meanwhile, earnings growth for the S&P 493 is expected to accelerate to 9 per cent in 2026, up from 7 per cent in 2025.

The S&P 493 is also likely to appeal to those seeking value. Goldman Sachs strategists led by Ben Snider see wide valuation spreads along with a favourable macroeconomic outlook boding well for value.

“Among sectors, low valuations relative to both history and profitability add to arguments in favour of health care, where we recommend an overweight alongside materials, consumer discretionary, and software and services,” Snider wrote in a note published Jan 6. BLOOMBERG