Beyond the Magnificent 7 tech stocks: New opportunities for growth

Stock returns are far less correlated than they have been in the last 40-to-50 years, which is exciting for active managers. The US is a fertile ground for stock pickers.

Growth stocks worked well over the last two years, but their leadership was dominated by the so-called “Magnificent 7” tech stocks.

Now, earnings growth expectations for S&P 500 companies outside of the seven are much more compelling compared to a year ago. While top-level valuations are somewhat elevated, many parts of the market look broadly fair so it’s going to be all about the fundamentals, earnings growth, and identifying where the upside to numbers really is.

Tech is still key, but it’s no longer all about AI – even if AI is still very, very important. Other parts of the sector, like software, are starting to appeal again after overheating post Covid. Broader economic improvement is also surfacing more high-quality growth companies in other sectors, such as industrials and financials.

Let’s look at some of the US market’s key opportunities right now.

1. Capitalizing on AI Stocks beyond the tech leaders

We’re only in the early stages of the AI transformation – but it’s already clear it will impact every company in every industry in the economy. After the spending boom of recent years, we’re expecting capex to slow slightly, especially for companies that aren’t seeing great returns on their investment or those, like Google, where AI development threatens to cannibalise their core business.

But that leaves room to explore some more creative ideas. For example, many of the tech titans are wary of relying on one supplier (NVIDIA) for the chips they need to power their AI solutions. Instead, they’re trying to take control over their own destinies. Some, like Amazon, intend to invest much more aggressively in their own custom chips, and that benefits companies like Broadcom. The launch of China’s DeepSeek and the apparent chip-efficiency of its models only make these developments more imperative.

There are more opportunities in software – particularly names like HubSpot, whose technologies should be very much in demand. Industrial companies exposed to electrification, and to the physical and digital infrastructure needed to power AI are also likely to see interest. Other industries have lagged in recent times, providing potential value opportunities. Examples include travel and transport, where aftermarket commercial aerospace has taken some time to reach full post-Covid recovery but now looks very appealing.

As always, it’s a question of picking and choosing your spots. One of the most exciting things for us all is finding some of the more underappreciated beneficiaries of AI – and there are plenty given the tailwinds from the capital spending boom.

Relevant ETF: JPM US Growth Equity ActiveUCITS ETF (JGRO)

2. The AI boom is driving a power infrastructure shift

Power demand in the US has only grown by around 0.5% over the last two decades, but a step change is underway – driven in part by that data centre buildout, in addition to a general need for investment in the space.

Generative AI is extraordinarily power intensive. Its needs are orders of magnitude greater than those for clouds, and data centres need to catch up. We’re at an inflection point in power demand growth and it must prompt a significant investment cycle.

Utilities companies acknowledge they’re massively under invested in infrastructure – and that’s even without power demand growing.

Ultimately, the US is short of power for the AI revolution it intends to lead. There needs to be significant investment in the grid. We’re going to need everything – renewables, shale, gas, you name it! Investors should get into position now.

Relevant ETF: JPM US Value Equity Active UCITS ETF (JAVA)

3. Financials show signs of recovery amid easing pressures

Financials have been a bit unloved since the Global Financial Crisis, but recently there have been signs of a rebound.

It’s a very diversified sector, ranging from banks and insurance to asset managers, broker dealers and insurance agents. Banks especially were hit hard by the Federal Reserve’s inflation-associated rate hikes.

Margins were under severe pressure for a while, but we’re through the worst of that and rate cuts and a steepening yield curve are now easing pressures. 

Valuations have returned to something like normal, but there’s still some room to run, especially for names like Wells Fargo that have been ‘artificially’ held back by idiosyncratic issues it had to resolve.

Relevant ETF: JPM US Value Equity Active UCITS ETF (JAVA)

4. Policy shifts and market confidence under Trump 2.0

Over the long term, we believe that earnings and cash flows drive stock prices. Recently, however, we’ve seen the vast majority of earnings growth remain concentrated in a small subset of technology-oriented names. Looking ahead, this is poised to change, offering a broader set of opportunities for investment.

In recent months, we’ve seen and heard a marked change of tone. Business and consumer confidence are starting to improve. For that post-Covid broadening to really take hold, we needed to see improvements in the cyclical parts of the economy.

Our research analysts expect a broadening out of earnings growth. In 2024, the Magnificent 7 delivered 34% earnings-per-share (EPS) growth vs. only 3% growth from the other 493 companies in the S&P 500 Index. In 2025, however, our analysts expect the “other 493” to narrow this growth differential, with 11% earnings growth vs. 24% from the Magnificent 7, bringing overall market growth higher, along with a breadth of new opportunities for investment. (J.P. Morgan Asset Management as of 31 January 2025).*

Relevant ETF: JPM US Equity Active UCITS ETF (JUSE)

A stock picker’s market is taking shape, creating new opportunities

Regardless of where you are on the investing spectrum, the chances of a soft landing have improved slightly – easing the situation for cyclicals and improving the prospects of value stocks.

For growth, fundamentals are improving broadly. Juxtapose that against increasingly concentrated benchmarks and growth-oriented stock-picking opportunities look unprecedented.

At the core, valuations are fair, but the expansion of market leadership is exciting. The active advantage could be huge here. It’s long been said that investors only look at their core allocations through a passive lens, but that’s starting to change. We believe the shift towards active ETFs should, and will, continue. Watch this space.