For the past three years, a handful of US-listed mega-capitalisation AI stocks have driven a disproportionate share of stock market gains. But there are tentative signs that the rally is expanding into new sectors, leading some investors to question whether it is time to reappraise some of the stocks they have overlooked in recent times.
One of the key trends of the year is a divergence in the performance of the Magnificent Seven club of big-tech shares, which together account for around 35% of the S&P 500’s market capitalisation. The correlation in the performance of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla has fallen to its lowest level in years as these stocks are increasingly traded on their individual merits.
While Apple (up around 29% at the time of writing), Nvidia (up 15%) and Microsoft (up 10%) have helped to lift the S&P 500 and Nasdaq indices this year, other Magnificent Seven stocks have faltered. Alphabet shares dropped 13% on Thursday, wiping out roughly $500 billion in market cap and leaving the stock down around 10% for the year to date. Meta (down 5.39%) and Tesla (down 10.32%) have also seen their valuations drop.
Because some club members have been rerated due to disappointing earnings and concerns about negative free cash flow, the Magnificent Seven as a group has lagged the performance of the broader S&P 500 this year. The S&P 500 has returned around 12.5% for the year to date, while the Bloomberg Magnificent 7 Total Return Index (an equally dollar-weighted equity benchmark tracking the seven mega-caps) is up just 6% for the year.
October has shown further signs of investor interest in assets outside of big tech. The old economy-focused Dow Jones Industrial Average (up nearly 3% for the month) and the small-cap Russell 2000 (up 2.2%) outperformed the tech-heavy Nasdaq Composite, which had fallen nearly 3% for the month at the time of writing. These moves suggest some investors are looking beyond the big AI plays.
Corporate earnings, underpinned by a surprisingly healthy US economy, support this trend. According to FactSet, of the 24% of S&P 500 constituents that reported by 23 October, 83% beat earnings estimates for the third quarter and 66% exceeded revenue expectations. Meanwhile, US GDP grew at an annualised 3.4% in the third quarter. Strong consumer spending suggests that corporate earnings growth is not only an AI story.
This year has already seen a major broadening beyond the Magnificent Seven as investors looked towards emerging markets for growth. Asian semiconductor and AI infrastructure companies such as TSMC, Samsung and SK Hynix have outperformed for the year to date as investors sought out alternatives to the richly valued Magnificent Seven shares.
This has led to concerns about concentration risk and bubble valuations in emerging markets, with a few companies and indices producing the bulk of the returns for the year. South Korea’s KOSPI Index is up around 41% year-to-date, mostly due to the strong performance of Samsung and SK Hynix. But even in this context, there may still be some underappreciated AI stocks like China’s Tencent.
Furthermore, corporate earnings growth and macroeconomic fundamentals in many of the key emerging markets are healthy even as valuations remain heavily discounted relative to developed markets. This leads some fund managers such as Ninety One to suggest that there are compelling pockets of value outside of developed markets.
Europe, long dismissed as a slow-growing and unexciting market, may also warrant attention. According to data compiled by Bloomberg Intelligence, earnings growth for the third quarter in the Stoxx Europe 600 is projected to reach around 23%. This brings Europe closer to US growth rates than at any point in more than three years. At 14 times forward earnings, the Stoxx Europe 600 is trading at a 25% discount to the S&P 500.
One caveat is that this is not the first time in recent years that industrials, quality shares and emerging markets have looked set to benefit from a rotation. We have repeatedly seen indications of the AI boom faltering and other sectors showing signs of life, only for the Magnificent Seven and the AI theme to reassert themselves. We would look for the following as signs of a sustained rerating of underappreciated stocks and sectors:
- Consensus earnings forecasts for industrials, financials and non-AI technology improving relative to mega-cap technology
- Equal-weighted indices and non-US markets outperforming over several months
- Discounts narrowing alongside better profitability and returns on capital
- Companies converting revenue growth into cash and raising shareholder distributions
A rerating of companies whose prospects have been overshadowed by the AI narrative would not necessarily come at the expense of the AI giants. The AI theme could continue to boom even as investors recognise that attractive returns are available elsewhere. A correction of AI stock valuations, by contrast, could lead to a risk-off environment that would be widely negative for equity markets.
As such, we are not necessarily predicting a great rotation. Rather, we have positioned our clients to benefit from a range of potential outcomes. Our portfolios include ‘satellites’ such as quality-style funds and emerging-markets allocations to capture undervalued or overlooked opportunities, while we use passive strategies to capture the ebb and flow of sectoral performances within broader market indices.
“The Magnificent Seven companies all have different exposures to AI. This requires a much more granular approach to which of the largest mega-caps an investor wants to own as opposed to just owning them wholesale.”
– Gil Luria, Analyst at DA Davidson
“The greater the mania in one sector of a market or in one stock market, the more likely that neglected asset classes elsewhere offer huge appreciation potential.”
– Veteran Investor, Marc Faber
Global News
- The technology sector is facing growing investor scrutiny as the enormous cost of AI expansion raises questions about future profitability. Although demand for AI cloud services remains strong, slowing growth in established businesses and mounting infrastructure expenditure are putting pressure on cash flow. Investors are increasingly favouring companies able to finance their AI ambitions through existing earnings, while becoming less tolerant of those relying on borrowing or external funding. Thursday’s technology-led selloff, despite gains across much of the broader market, highlighted a growing divergence between AI-related stocks and the wider equity market.
- The US dollar remains on course for a second consecutive monthly gain, supported by resilient economic growth, persistent inflation and expectations of further Fed rate increases. The Bloomberg Dollar Spot Index reached its highest level since May 2025 in October, with elevated oil prices and AI-related capital inflows providing additional support. Despite easing on Friday amid falling Treasury yields and concerns over AI spending, strategists expect economic fundamentals and monetary policy to outweigh potential political gridlock following the US midterm elections.
- Gold prices fell towards $4,000 an ounce on Friday, extending October’s decline to almost 4% as stronger US inflation reinforced expectations of further interest-rate increases. The Fed’s preferred inflation measure rose 0.5% in September, its largest monthly increase since March, while elevated oil prices added to inflationary pressures. A technology-led equity selloff also increased the risk of investors liquidating gold holdings to cover losses, leaving the metal on course for a second consecutive monthly decline.
- Oil prices fell on Thursday as reports of renewed US-Iran diplomatic contacts raised hopes of easing Middle East tensions, with Brent crude declining 1.3% to approximately $114 a barrel. Despite the retreat, prices have risen by around 10% in October as attacks on energy infrastructure and shipping continue to fuel supply concerns. Saudi Arabia’s exports have nevertheless recovered to approximately 6.5 million barrels a day following the reopening of its East-West pipeline, easing pressure on global crude supplies even as geopolitical risks keep prices elevated.
- The US midterm elections on Tuesday, 3 November, will determine control of Congress for the remainder of President Donald Trump’s term, with Republicans defending narrow majorities in both chambers. Rising living costs and the economic impact of the Iran war have dominated the campaign, while a Reuters/Ipsos poll released on Monday showed Democrats leading Republicans by 47% to 36% among registered voters. A loss of either chamber would constrain Trump’s legislative agenda and complicate fiscal negotiations, with implications for US economic policy and financial markets.
- The US economy expanded at an annualised rate of 3.4% in the third quarter, its fastest pace in a year, exceeding economists’ forecasts and accelerating from 2.2% in the previous quarter. According to figures released by the Bureau of Economic Analysis on Thursday, growth was driven by resilient consumer spending, which rose 3.8%, and strong business investment linked to AI. The expansion came despite elevated energy prices and persistent pressure on household finances, highlighting the resilience of the US economy even as inflation remains a concern for monetary policymakers.
- The Fed held interest rates at 3.75% to 4% on Wednesday, with two policymakers favouring a quarter-point increase. Chairman Kevin Warsh warned that inflation remained too high despite strong economic growth, leaving December’s rate decision dependent on incoming data.
- The European Central Bank held its deposit rate at 2.5% on Thursday, warning that elevated energy prices continued to threaten inflation amid rising borrowing costs. President Christine Lagarde also announced she would step down in February 2027, eight months ahead of schedule. Surging government bond yields, particularly in heavily indebted France, are weighing on growth and complicating monetary policy. Markets anticipate a possible rate increase in December.
- Britain’s Finance Minister John Healey announced £2.6 billion in household energy support and extended fuel-duty relief on Wednesday, while cutting the UK’s 2027 growth forecast to 1% from 1.6%. The measures, partly funded by tax increases, aim to ease pressure from rising energy costs. However, higher borrowing costs have reduced the government’s fiscal buffer from £24 billion to £15 billion, limiting its ability to absorb further economic shocks and raising concerns over fiscal sustainability.
- The Bank of Canada raised its benchmark interest rate by a quarter-point to 2.5% on Wednesday, its first increase in more than three years, adding pressure to an already struggling housing market. The decision highlights the challenge of containing inflation without further weakening economic growth.
- The Bank of Japan held its benchmark interest rate at 1.25% on Friday following September’s increase but signalled that further tightening remains likely as inflationary pressures persist. The central bank raised its inflation outlook and indicated that underlying inflation had reached its 2% target, marking a significant shift after decades of combating deflation.
- Iran’s Supreme Leader Mojtaba Khamenei reaffirmed Tehran’s conditions for ending the war with the US on Tuesday as regional diplomatic efforts intensified. Iran is demanding an end to the US naval blockade and oil sanctions while seeking to retain control of the strategically important Strait of Hormuz. Washington is pressing for concessions on Iran’s nuclear programme. Saudi Arabia, Turkey, Pakistan and Qatar are pursuing diplomatic efforts to prevent renewed fighting. The competing demands highlight obstacles to a lasting settlement and continued risks to global energy supplies.
- Israel’s inconclusive parliamentary election has left Prime Minister Benjamin Netanyahu heading a caretaker government, with neither his coalition nor the opposition securing the 61 seats needed for a majority. Updated results on Thursday showed Arab-led parties holding a potentially decisive position in coalition negotiations, although significant political divisions complicate the formation of a new government. The uncertainty has weighed on Israeli financial markets, with the shekel weakening and Tel Aviv equities declining, while prolonging questions over the country’s political leadership amid the conflict with Iran.
- Alphabet suffered its largest-ever market-value decline on Thursday, shedding more than $500 billion as shares fell 13% following disappointing third-quarter results. Revenue of $111.2 billion missed forecasts, while search advertising growth slowed to a five-quarter low amid weaker monetisation of AI-powered searches. Despite strong Google Cloud performance, free cash flow remained negative for a second consecutive quarter, with future infrastructure commitments exceeding $1 trillion. The results intensified concerns over AI investment returns and pressure on Alphabet’s core advertising business.
- Amazon shares fell approximately 7% in after-hours trading on Thursday, following disappointing third-quarter results that highlighted soaring AI infrastructure spending and the slowest growth in its online retail business in three years. Although Amazon Web Services continued to benefit from strong demand for cloud computing and AI services, substantial capital expenditure pushed free cash flow into negative territory. The company maintained its $220 billion investment forecast for 2026 and signalled further increases next year, intensifying investor concerns over the returns on its expanding AI investments.
- Microsoft shares gained 1.3% during after-hours trading after reporting stronger-than-expected quarterly results on Wednesday but finished the following trading day down 0.16%, with Azure cloud revenue surging 48% on robust demand for AI services. Despite capital expenditure reaching $45.2 billion as the company expanded its AI infrastructure, Microsoft generated positive free cash flow of $18.6 billion. The company also introduced a voluntary severance programme to contain costs and reshape its workforce. The results highlight Microsoft’s ability to sustain substantial AI investment while maintaining cash generation and financial discipline.
- Meta increased its planned equity fundraising to nearly $98 billion on Monday to finance its expanding AI infrastructure, in one of the largest share offerings in history. The company has already raised $37.5 billion, with another $60 billion planned. Chipmakers Nvidia, AMD and Broadcom have agreed to invest up to $5 billion collectively, raising concerns about AI suppliers financing their own customers. The scale of the fundraising highlights the capital demands of AI expansion and potential dilution for existing shareholders.
- SK Hynix reported a sevenfold increase in third-quarter operating profit to 83.3 trillion won ($62.5 billion) on Wednesday, beating forecasts as surging AI demand and higher memory-chip prices drove record earnings. The South Korean chipmaker said its memory production was sold out through 2029 and expects supply shortages to persist through 2030. It also announced an additional $45 billion in shareholder returns, bringing its planned total for 2026 to around $75 billion through dividends and share buybacks. The share price is up 19.5% for the week.
- Samsung Electronics reported record third-quarter operating profit of 107.4 trillion won ($80 billion) on Thursday, driven by surging demand for AI memory chips, although earnings fell short of market expectations. The company plans to increase annual capital expenditure to approximately $63 billion, with high-bandwidth memory supply already committed for 2027 as demand continues to outstrip production. Despite the record results, shares closed more than 4% lower after Samsung deferred details of its next shareholder-return plan until January, disappointing investors seeking greater clarity on how its substantial profits will be distributed.
- Anthropic’s planned IPO could raise more than $100 billion at a potential valuation of $1.5 trillion to $2 trillion, potentially making it the largest stock market listing in history. The AI developer filed its prospectus on Monday, revealing first-half revenue of $16.3 billion, although substantial losses and long-term computing commitments have raised concerns over its financial sustainability. The proposed listing would provide a significant test of investor appetite for highly valued AI companies amid growing scrutiny of the sector’s profitability.
- Eli Lilly raised its 2026 revenue forecast to $91 billion–$92 billion on Thursday after strong demand for its weight-loss and diabetes treatments drove a 39% increase in third-quarter revenue. Sales of Mounjaro and Zepbound continued to underpin growth, reinforcing the company’s position in the expanding obesity treatment market. However, Lilly lowered its adjusted profit outlook due to acquisition-related research charges, while sales of its newer weight-loss pill, Foundayo, fell short of expectations.
- Binance, the world’s largest cryptocurrency exchange, reported on Friday that hackers had affected an estimated $6.3 billion in digital assets, potentially the largest cryptocurrency theft on record. The exchange suspended withdrawals, froze approximately $3 billion in assets, and pledged to cover customer losses. Blockchain investigators linked the attack to North Korean hackers. Bitcoin briefly fell below $77,000, its lowest level in more than a month, as the breach raised fresh concerns about security and investor confidence in cryptocurrency markets.
- As at Thursday’s close the S&P 500 was 1.27% up for the week.
Local News
- Revised GDP calculations released by Statistics South Africa on Thursday show that the South African economy is 5.3% larger than previously estimated. The figures value GDP at R8.04 trillion in 2025, reflecting improved measurement of previously undercounted activities, including illegal mining, online gambling, e-hailing and self-generated electricity. While the larger GDP base could improve fiscal indicators such as the debt-to-GDP ratio, it does not represent stronger growth, which was revised down from 1.1% to 0.9% for 2025.
- Moody’s described South Africa’s latest medium-term budget as credit-positive on Monday, strengthening prospects of a sovereign rating upgrade within 12 to 18 months. The agency welcomed the reduction in the 2026/27 deficit target from 4% to 3.9% of GDP and proposed fiscal rules but cautioned that implementation and high debt-servicing costs remain challenges. South Africa retains its Ba2 rating with a positive outlook, with the next review scheduled for 27 November.
- Yet Business Leadership South Africa warned on Wednesday that the country risks returning to the Financial Action Task Force’s greylist, just a year after its removal in October 2025. Progress in combating corruption and organised crime remains inadequate, with its anti-corruption reform score unchanged at 51.2. Weaknesses in investigations, prosecutions and asset recovery could jeopardise compliance ahead of a FATF peer review in early 2027, potentially increasing financial compliance costs and complicating cross-border transactions.
- South African Reserve Bank Governor Lesetja Kganyago said on Thursday that current monetary policy should be sufficient to return inflation to its 3% target once the effects of the Middle East conflict subside. The bank’s modelling indicates no additional tightening is necessary at present, although it remains alert to the risk of higher energy prices becoming embedded in wages and broader inflation.
- The US will decide on Monday, 2 November, whether South Africa retains its duty-free trade benefits under the African Growth and Opportunity Act (AGOA). Trade and Industry Minister Parks Tau said on Thursday that the government had made extensive efforts to retain access while pursuing alternative export markets. The decision has significant implications for South Africa’s automotive, agricultural and manufacturing sectors, although negotiations with Washington remain open.
- Morocco has overtaken South Africa in RMB’s latest ranking of Africa’s most attractive investment destinations, rising to fourth place as South Africa slipped to fifth. The report, released on Tuesday, highlights Morocco’s expanding automotive and tourism sectors and economic growth approaching 5%, compared with South Africa’s average of approximately 1% over the past decade. The findings underscore the importance of addressing South Africa’s infrastructure constraints and improving its investment competitiveness.
- The Centre for Development and Enterprise (CDE) urged Johannesburg’s next mayor on Thursday to establish a business-led growth task force following the 4 November municipal elections, prioritising service delivery and financial stability. The CDE highlighted the city’s 35.9% unemployment rate, the highest among South Africa’s metros, and the loss of approximately 90,000 jobs in the year to June. It also questioned the feasibility of Johannesburg’s R111 billion development strategy, calling for stronger municipal capacity and private investment to revive growth.
- Harith’s R7 billion acquisition of FlySafair received conditional approval from South Africa’s Competition Tribunal, the company confirmed on Thursday, paving the way for completion by year-end. The deal would bring the country’s largest domestic airline, with more than 60% of seating capacity, under South African ownership, addressing longstanding regulatory concerns. Conditions will safeguard against conflicts of interest arising from Harith’s stake in Lanseria International Airport, while FlySafair will retain its management and low-cost operating model.
- Marriott International opened Africa’s first Edition-branded hotel at Cape Town’s V&A Waterfront on Tuesday, following a R1.1 billion investment by the Growthpoint and Public Investment Corporation-backed V&A Waterfront Company. The 142-room property represents South Africa’s largest single-hotel investment since the 2010 World Cup development boom, highlighting continued confidence in Cape Town’s luxury hospitality sector.
- Pick n Pay is planning to reduce the size of selected supermarkets as part of its turnaround strategy, following earlier store closures aimed at improving efficiency and controlling costs. The retailer reported on Monday that its headline loss narrowed 31.9% to R299 million in the six months to 30 August, although turnover excluding Boxer remained flat at R36.4 billion. Online sales grew 35.4%, making it a stronger-performing channel as the group continues to restructure its traditional supermarket operations.
- Heineken is reviewing its South African wine portfolio, including Nederburg and JC Le Roux, three years after acquiring Distell for €2.2 billion. The company confirmed on Wednesday that no decision on a sale had been made. The review follows integration difficulties and market-share losses that resulted in a €491 million impairment in 2023, while wine sales remain under pressure despite stronger performance in beer and ready-to-drink beverages.
- A study by research firm Yazi released on Wednesday found that 85% of South Africans surveyed had encountered fraud in the past year, with one in five suffering financial losses. Lower-income victims were particularly vulnerable, with median losses equivalent to 40% of monthly income, while three-quarters of victims recovered nothing. The findings highlight the growing financial impact of fraud on South African consumers.
- As of the time of writing, the rand was 0.41% weaker against the dollar, and the ALSI was 0.7% up for the week.
Sources: Dynasty, Bloomberg, Reuters, Daily Maverick, Business Day, Moneyweb, ITWeb, etc
