Equities in Focus

While two months does not make a long-term trend, the change in the S&P 500’s year-to-date sector leadership is not inconsequential Display 1. While popular investor sectors such as communication services and technology have dominated US large cap market returns in recent years (thanks in part to AI and cloud computing), tech stocks in particular have struggled versus others from a return standpoint in 2025. 
 

Drivers of the Rotation

Some notable contributors to these shifting sands range from concerns surrounding AI monetization after so much money being spent by large tech firms relating to it, to tariff fears and what that could mean for inflation. Consequently, more defensive sectors such as health care and consumer staples have benefitted from this quest for safety, and their lower valuations have been icing on the cake. But what equity markets ultimately respond to most is earnings growth. And as Display 2 shows for both this year and 2026, the earnings growth for the S&P 500 and US large cap stocks, excluding the Magnificent 7 (Mag 7), are closing in on the latter. Combine that, along with many stocks outside of this formally coveted cohort were trading at a discount to the Mag 7, underscores the long held maxim that price matters, especially in periods of change and uncertainly.  
 

Our View

Time will tell if this texture change continues, but we believe an important driver that could extend its runway is lower interest rates. There has been a strong relationship between S&P 500 market breadth and Ten-Year US Treasury Note yields, as shown on Display 3. If rates continue to go lower this year, as we expect, more stocks may attract investor attention beyond a select group, which would likely further accrue to the benefit of active managers’ 2025 relative returns.

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