AN ERA OF TECHNOLOGY LEADERSHIP
Over the past several years, outperformance by the technology sector has been a defining feature of this bull market.
Investors have been regularly wringing their hands over the valuations of the so-called "Magnificent Seven"* stocks in comparison with the market as a whole. * The "Magnificent Seven" is popularly defined as Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia, and Tesla.
Several times over this period, market leadership seemed to rotate to other sectors. Each time, however, the technology sector regained leadership, ultimately pushing the S&P500 to all-time highs.
IS THIS LEADERSHIP ENDING?
This time, the rotation to new leadership might be longer lived. The question for investors is this:
Can anyone catch these trends consistently without succumbing to repeated head fakes and false signals?
We have our doubts that investors can do this well. Owning diversified index funds is not as interesting to discuss at cocktail parties, but to paraphrase an old boss, "I'd rather have rather have an "eat well" portfolio than a "talk well" portfolio?
RECENT PERFORMANCE SUGGESTS A ROTATION
You might be surprised to learn that, in 2025, only two of those Mag7 stocks, Nvidia and Alphabet, outperformed the market. The other five did not. Chasing the Mag7 resulted in a less-than-stellar result.
More recently, Microsoft posted remarkable quarterly earnings (up 59% versus last year) but investors were spooked by the company's aggressive AI-centric capital expenditure plans and questioned whether or not this spending will earn a good return on investment.
The shares declined by ten percent in one day.
Investors seem to be increasingly discerning when it comes to AI claims and spending.
2025: THE SAME, BUT DIFFERENT
Despite all this talk, tech was still the top performing sector in 2025. 2026 is a different story, with the sector among the three worst performing over the past quarter.) Additionally, the top performers in the tech sector for 2025 were not the Mag7. Instead, investors shifted focus to the companies that stand to benefit from the AI buildout.
International investors also had a day in the sun last year. Thanks in part to a weakening US dollar, both developed and emerging international markets outperformed their US counterparts in 2025. Owning foreign stocks isn't always the top idea, but over time, it has made sense.
Few investors recall that small company stock indexes were once the top performers, but it's true. Over the past twenty-five years,returns for small cap stocks have been nearly double the return of the S&P500. Yet over the most recent ten years, they have underperformed in nine of them. 2025 was a continuation of this trend, but at some point, it will reverse.
In short, diversification helped last year but always has some disappointments, too. But like homeowner's insurance, the fact that the house didn't catch fire doesn't make insurance a bad idea. The reduced portfolio volatility that comes from diversification is a distinct benefit to investors over time.
STICK WITH WHAT YOU KNOW
As advisors, we like to see a broader market where more than just a few stocks perform well and where diversification adds value. We also know that there are cycles, and while we can't predict them, we know that there are no "one decision" stocks or sectors of the market.
We have always advocated for a portfolio that is allocated across sectors and geographies, to both "value" and "growth" investment styles, and to an appropriate mix of risk and income assets. The investor is then always "in the river", letting the power of earnings growth and compound interest to do the hard work and carry them onward.
Markets will always have cycles, of course, and market leadership will change again and again. When investors focus on what they can control, such as managing costs, taxes, and their savings rate, they need not chase the hottest sectors in order to meet their long-term goals.
Investors periodically forget that investing is not a race to be won or lost this month or this year, or where they must repeatedly switch lanes in order to be successful. Successful investing it is an exercise in longevity, persistence, and patience where avoiding self-inflicted mistakes may be the best advice of all.