According to analysts at Bank of America, the dominance of Big Tech may be nearing its end. As the "Magnificent Seven" tech giants have grown larger in the S&P 500, several macroeconomic and sector-specific trends signal potential challenges ahead, according to the bank.
Firstly, BofA points out that the primary driver of Tech outperformance has been earnings. However, the differential between Tech and non-Tech earnings growth is expected to narrow significantly by the fourth quarter of this year. This suggests a broadening in returns by the end of 2024, diminishing Tech's relative advantage.
Secondly, BofA's global regime models, which shifted in February, now favor deep value and cyclical stocks over Tech. This shift indicates a potential rotation away from technology towards other sectors that might offer more attractive valuations and growth prospects.
Thirdly, companies that have benefited from providing efficiency tools, such as today's NVIDIA (NASDAQ:NVDA), could lose momentum as sales growth decelerates and capex spenders begin to realize productivity gains. This transition could lead to a slowdown in the growth of companies that have heavily relied on capex-driven sales.
Lastly, BofA believes that higher interest rates for a prolonged period could make high free cash flow and dividend yields more attractive compared to Tech stocks. While some of the "Magnificent Seven" may offer these financial benefits, not all of them do, potentially leading investors to seek opportunities elsewhere.