What’s replacing Mag 7 leadership?

Look to materials, industrials, global investing

Last time we introduced our thesis that market leadership is undergoing a change. Drawing a parallel from the recent World Cup games, the lesson is obvious: Yesterday’s champions are not guaranteed tomorrow’s success.

For much of the last decade, the investment playbook was simple: own America’s mega-cap technology stocks. When they rose, the S&P 500 rose with them. When they stumbled, the broader market usually followed. That relationship has begun to break down. The once-vaunted Mag 7 – a useful, if imperfect, proxy for the AI hyperscalers – has struggled this year.

Meanwhile, a very different set of winners has emerged., ranging from U.S. small cap stocks to Emerging Markets to value stocks and equal-weighted indexes. Leadership has begun to broaden beyond the familiar mega-cap names.

We believe this rotation has legs. For reasons, we started with a look at the spread of AI beyond the companies that started it.

Here are two more key drivers of the rotation in market leadership.

Higher rates are changing the rules of the game

For most of the post-Global Financial Crisis era, investors enjoyed an extraordinary tailwind: interest rates kept falling. That mattered because lower discount rates made future earnings more valuable. Investors were willing to pay almost any price for companies promising rapid growth years – even decades – into the future. It was the ideal backdrop for long-duration assets like technology.

That world is over. Money has a cost again.

Despite repeated hopes for lower rates, inflation has proven far stickier than expected. This has been one of Forstrong’s defining Super Trends for years – and one that has served our clients well. Massive fiscal deficits, reindustrialization, defence spending, and energy security all point to a world where interest rates are likely to remain structurally higher than they were during the 2010s.

That changes the rules of the game. And when the rules change, so do the winners. Investors become less willing to pay for distant promises and more interested in businesses generating cash flows today. It’s one of the biggest reasons leadership has broadened beyond a handful of mega cap technology stocks.

Banks benefit from stronger net interest margins. Insurers earn more on their investment portfolios. Industrials, energy and materials companies stand to gain from the rebuilding of infrastructure and manufacturing. Businesses that spent years in the market’s penalty box suddenly look much more attractive when capital once again carries a meaningful price.

Higher rates don’t immediately end bull markets. They simply change who leads them.

Portfolio Playbook

• Broaden exposure beyond long-duration growth stocks.
• Increase allocations to companies and sectors with pricing power that benefit from a higher-rate environment, including materials, industrials, and select financials.
• Build portfolios that can thrive even if interest rates remain higher for longer (see our commentary for income investors, “Bond Market Meltdown: A Survival Guide for Income Investors”).

The rise of the rest: global investing is back

For much of the past decade, investing outside the United States felt like an exercise in patience. Europe struggled with sluggish growth. Japan remained trapped in deflation. Emerging markets lurched from one crisis to the next. Meanwhile, America’s technology giants dominated earnings growth and attracted an ever-larger share of global capital.

That world is changing, too.

Germany alone plans to borrow more than €800 billion by 2030 – the biggest fiscal pivot in modern history. After decades of restraint, Europe is rebuilding its military, modernizing infrastructure, and strengthening energy security. Defence spending is set to reach levels not seen since the Cold War, creating a powerful tailwind for European industry.

Japan’s revival continues to gather momentum. Rising wages, improving corporate governance, and shareholder-friendly reforms are finally unlocking value after decades of economic stagnation.

Emerging markets may offer the most compelling story of all. Many investors still think of the asset class as a risky value trap. We think they’re looking backward. The real story, looking ahead, is earnings. Forward earnings per share estimates have surged roughly 40% this year – well ahead of the market itself – driving valuations lower even as share prices have risen. In other words, earnings are growing faster than stock prices.

None of this means the AI story is broken. Far from it. If anything, AI is becoming much bigger than the companies that started it. The market is already rewarding many of the businesses supplying the AI buildout, from semiconductor manufacturers to electrical equipment, power infrastructure and industrial automation.

But history suggests the next phase will look different. Every major technological revolution follows a similar path. First comes the infrastructure. Then come the applications. The internet offers a useful comparison. Cisco built much of the plumbing. But the greatest long-term value accrued to companies like Amazon and Google that found profitable ways to use it.

AI will likely follow the same path. The biggest winners won’t simply build the models. They’ll use AI to improve productivity, lower costs, and grow earnings in industries like healthcare, robotics, manufacturing, logistics, and defence. That transition won’t happen overnight. There will almost certainly be periods when enthusiasm for AI infrastructure runs ahead of reality – as this year’s parabolic rally in semiconductor stocks reminds us.

But the bigger point remains intact. AI is no longer a story about seven companies. It is becoming an economy-wide investment and capital spending cycle.

The AI race has unleashed one of the largest investment booms of the modern era, rivaling anything seen outside the industrial mobilization of the Second World War. It is fueling a surge in construction, power generation, banking, credit, mergers and acquisitions, equity issuance, and asset management as governments and corporations race to finance the next wave of innovation.

Portfolio Playbook

• Look beyond the United States for the next generation of market leaders. Increase exposure to countries benefiting from structural investment themes, including Japan, Taiwan and parts of Europe.
• Focus on regions where earnings are accelerating, not simply where valuations appear inexpensive.

Bottom line

The market no longer needs seven stocks to carry it forward. New leaders are emerging. The playbook that won the first half of this decade is unlikely to be the one that wins the second. Halftime is when great teams adjust their game plan. Investors should too.

Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on X at @TylerMordy and @ForstrongGlobal.

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The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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