Goodbye, Mag 7! These 3 Buy-Rated Small-Cap Stocks Are Starting to Outperform

The recent shift away from the so-called "Magnificent Seven" stocks—Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta Platforms, and Tesla—toward promising small-cap stocks could signal a significant change in market dynamics. This blog post explores the potential short-term and long-term impacts of this trend on the financial markets, as well as identifying indices, stocks, and futures that may be affected.

Short-Term Impacts

Volatility in Large-Cap Stocks

As investors pivot from the larger, established tech giants to smaller, less-known companies, we may see increased volatility in the performance of the "Mag 7" stocks. This shift could lead to a temporary dip in their stock prices as demand decreases.

Affected Indices:

• S&P 500 (SPX)
• NASDAQ Composite (COMP)

Increased Interest in Small-Cap Stocks

On the flip side, small-cap stocks are likely to experience heightened interest, leading to short-term rallies in their prices. The trend towards small-cap investments could also create momentum for exchange-traded funds (ETFs) that focus on this segment.

Potentially Affected ETFs:

• iShares Russell 2000 ETF (IWM)
• Vanguard Small-Cap ETF (VB)

Long-Term Impacts

Revaluation of Market Segments

The shift towards small-cap stocks may indicate a broader market re-evaluation where investors seek growth outside the major tech titans. Historically, similar scenarios have led to periods of sustained growth in small-cap indices.

Historical Reference:

In 2016, after a prolonged period of large-cap dominance, small-cap stocks began to outperform, driven by renewed economic optimism and fiscal policies that favored smaller companies. The Russell 2000 Index saw gains of nearly 20% that year.

Potential Return to Value Investing

If the trend continues, investors may begin to favor value investing strategies over growth stocks, which could lead to a longer-term decline in valuations for large-cap tech companies. This could result in a more balanced market where small-caps gain traction.

Stocks to Watch

Some of the small-cap stocks that are starting to outperform may include:

1. Zebra Technologies Corporation (ZBRA) - Focused on enterprise asset intelligence and automation solutions.

2. Hologic, Inc. (HOLX) - A health and diagnostics company focusing on women's health.

3. Palo Alto Networks, Inc. (PANW) - A cybersecurity company that has potential for significant growth as demand increases.

Conclusion

The current trend of moving away from the "Magnificent Seven" towards promising small-cap stocks could have far-reaching implications for the financial markets. In the short term, we may see volatility in large-cap stocks and a rally in small-cap stocks. Long term, this could lead to a revaluation of market segments and a potential return to value investing. Investors should keep an eye on indices like the S&P 500 and Russell 2000, as well as specific stocks that show potential for growth in this new market landscape.

As always, investors should conduct their due diligence and consider diversifying their portfolios to mitigate risks associated with market volatility.