The artificial intelligence hype has provided a second wind for some of the megacap technology stocks – Microsoft Corp., Nvidia Corp., Meta Platforms Inc., Alphabet and Amazon.com – that have been dominating market performance for most of the past four years. But if a new research report by Scotiabank strategist Hugo Ste-Marie is accurate, the dominance will soon come to an end.
The expansion phase is also characterized by broad market leadership. More stocks generate strong earnings growth and the best returns come from buying earnings growth at the lowest price – the definition of a value market. A broadening in profit growth to sectors beyond technology would see the latter underperform. Because the S&P 500 is a cap-weighted index where returns are weighted heavily towards the largest stocks, benchmark performance could be disappointing even as the economy accelerates and earnings growth improves. This may prove a rude surprise for passive investors.
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