Broadening Participation Could Matter More Than Big Tech Earnings
One of the more important developments this week may not be found in the headlines surrounding the Magnificent 7 (MAGS ETF). It may be the quiet improvement taking place beneath the surface of the market. For much of the past two years, a small group of mega-cap technology companies has driven a disproportionate share of equity returns. That concentration has made it easy to overlook changes elsewhere in the market. Relative strength work at SIA, however, suggests the Russell 2000 (using proxy-ETF IWM) has begun outperforming both the Magnificent 7 and the Nasdaq 100 (QQQ ETF). While it is too early to conclude a lasting leadership change is underway, it is a development that deserves attention.
If this trend persists, the implications could extend well beyond small-cap investing. Broadening market leadership has historically been associated with improving economic confidence, expanding earnings participation, and healthier market internals. It can also reduce the market's dependence on a handful of companies to sustain index performance, creating a more balanced backdrop for equities. That does not necessarily mean the Magnificent 7 are entering a period of sustained underperformance. These companies remain exceptionally profitable and continue to lead in artificial intelligence, cloud computing, and digital infrastructure. The more interesting question is whether they need to lead from here for the broader market to continue advancing.
One of the strengths of relative strength analysis is that it often identifies changing leadership before it becomes obvious in headline performance numbers. Rather than predicting what should happen, it measures what is already happening. If the Russell 2000 continues to build relative strength against the market's largest companies, it may signal that investors are becoming more willing to broaden risk exposure beyond the narrow leadership that has defined much of this cycle.
That is precisely what we aim to identify in the Equity Leaders Weekly. Rather than focusing on the loudest headlines, we look for emerging trends that could shape portfolio positioning over the coming months. If you find value in this approach, we welcome introductions to other advisors who appreciate a disciplined, evidence-based perspective on market leadership.
The Magnificent 7 Remain Constructive, But Conviction Has Yet to Return
From a chart perspective, the ETF appears to be developing two nested price-discovery triangles, potentially reflecting a period of consolidation as investors evaluate future growth expectations. Resistance remains near the previous high of $71.84, with a Point & Figure vertical count objective of $91.11, while support is evident near $60.11 and again near the April low around $54.44. Although the broader technology sector continues to rank favorably within SIA's ETF universe, the ETF's neutral ranking suggests investors have not yet fully embraced the group with the conviction seen during earlier stages of the AI-driven advance.
Beneath the ETF's relatively stable performance, there is also growing divergence among the Magnificent 7 constituents themselves. Despite the group's reputation for driving market returns, year-to-date performance has become increasingly uneven. Apple remains the strongest performer, gaining 20.77% and outperforming the Invesco QQQ Trust's return of 15.95%. Nvidia, Alphabet and Amazon have also posted positive returns, though at more modest rates. Meanwhile, Meta Platforms has slipped into negative territory, while Tesla and Microsoft have experienced more significant declines.
This widening performance spread may suggest investors are becoming more selective rather than treating the group as a single thematic trade. In previous years, strength among a handful of companies often translated into broad leadership across the entire group. Today's environment appears somewhat different, with individual company fundamentals, valuation considerations and earnings expectations playing a larger role in determining relative performance. For advisors, this may be worth monitoring closely, as periods of narrowing leadership within dominant market themes have historically coincided with the emergence of opportunities in other areas of the market.
A Broader Market Is Beginning to Do More of the Heavy Lifting
The broader message, however, remains more balanced. Over the past quarter, the Russell 2000 has gained 8.04% compared with 2.51% for the Magnificent 7, while year-to-date performance stands at 20.37% versus 1.50%. That represents roughly 10.50% outperformance over the quarter and nearly 20% year-to-date, enough to shift the Point & Figure comparison chart into a negative trend for the Magnificent 7. The versus SMAX score remains 6, still modestly favoring the Magnificent 7, while the Russell 2000's SMAX score of 9 compares favorably to the Mag 7's reading of 8.
Although recent performance has tilted back toward large-cap technology, the longer-term relative strength trends continue to suggest that leadership is becoming less concentrated than it was earlier in the cycle. If that trend persists, market gains may increasingly be supported by a wider range of companies rather than a small handful of mega-cap leaders.
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