Unlocking Alpha in the S&P 500's "Other 493": A Strategic Shift Beyond the Magnificent Seven

The S&P 500's narrative in 2025 has been defined by the dominance of the “Magnificent 7”—Microsoft, Apple, NVIDIA, Alphabet, Amazon, Meta, and Tesla. These seven companies accounted for 52% of the index's total earnings growth in 2024 and 33% in 2025, despite their collective market cap representing just 28% of the index. Yet, a subtle but significant shift is underway. The “Other 493” companies, long overshadowed by their tech-driven peers, are showing signs of reemergence. With earnings growth projected to accelerate from 3.4% in Q2 2025 to 6.8% in Q3, and valuations trading at a 33% discount to the Magnificent 7, investors are beginning to see opportunity in the overlooked.

The Earnings Rebalancing: From Concentration to Diversification

The Magnificent 7's earnings growth has been extraordinary. In Q2 2025, their collective year-over-year earnings surged 26%, driven by AI-driven demand and pricing power in high-margin sectors. However, this dominance is waning. The law of large numbers is catching up: as these companies grow larger, sustaining hypergrowth becomes harder. For instance, NVIDIA's earnings growth, once a 14.1% juggernaut in Q2, is expected to slow to 9.5% in Q3. Meanwhile, the S&P 493's earnings growth is accelerating, with projections of 6.8% in Q3 and 10.8% in Q1 2026. By 2026, the S&P 493 could contribute nearly half of the index's earnings growth, a reversal from 2024's 52% dominance by the Magnificent 7.

This rebalancing is not just a statistical curiosity—it reflects a structural shift. Investors are rotating capital into equal-weighted ETFs, which allocate capital more evenly across the index. In Q4 2024, these funds captured 15.6% of U.S. ETF inflows, a sharp rise from prior periods. The move signals a rejection of the “winner-takes-all” dynamic and a search for more stable, diversified returns.

Valuation Attractiveness: A Contrarian Edge

The S&P 500's forward P/E ratio of 24x is driven largely by the Magnificent 7, which trade at a premium of 28.3x. In contrast, the S&P 493 trades at 16x, aligning with its 10-year average. This discount is even more pronounced when comparing price-to-sales ratios: the Magnificent 7's 7.2x versus the S&P 493's 2.0x. For investors seeking value, the S&P 493 offers a compelling entry point.

Goldman Sachs' revised 2025 EPS forecast for the S&P 500 ($262) underscores this trend. While the Magnificent 7's earnings growth is expected to slow, the S&P 493's 7% annual growth rate is in line with broader economic fundamentals. This makes the S&P 493 less susceptible to macroeconomic shocks, such as trade policy shifts or AI hype cycles. For example, the S&P 493's earnings are 70% domestically sourced, compared to the Magnificent 7's 50%, insulating it from global trade volatility.

Margin Expansion: Sector-Specific Tailwinds

Profit margins for the S&P 493 have been under pressure, with Q2 2025 earnings growth at just 1%. However, sector-specific trends are creating pockets of margin expansion. AI is no longer confined to tech giants; it is spilling into infrastructure, utilities, and industrials. For instance, companies supplying data centers or energy grids are seeing demand surge as AI adoption accelerates. The infrastructure sector, in particular, has attracted $1.5 trillion in inflows in 2025, driven by long-term contracts and inflation-linked cash flows.

Utilities are another bright spot. With earnings growth projected to average 8% annually over the next five years, utilities are trading at a 40% discount to the S&P 500. This reflects their role as a stable, income-generating asset in a high-rate environment. Meanwhile, industrials and energy are benefiting from capital expenditure (capex) growth, which has risen 4% year-to-date despite broader economic slowdowns.

Strategic Implications for Investors

The case for diversifying equity exposure beyond the Magnificent 7 is clear. While these companies will remain key drivers of growth, their valuation premiums and earnings deceleration create risks. The S&P 493 offers a more balanced approach: attractive valuations, stable earnings growth, and exposure to sectors insulated from macroeconomic volatility.

Investors should consider:
1. Equal-Weighted ETFs: These funds reduce concentration risk and capitalize on the S&P 493's earnings acceleration.
2. Sector Rotation: Overweight infrastructure, utilities, and industrials, which are poised for margin expansion.
3. Defensive Plays: Utilities and regional banks (trading at 14x forward P/E) provide income and stability in a stagflationary environment.

The S&P 493 is not a replacement for the Magnificent 7 but a complementary asset. As the market shifts from a “growth-at-all-costs” mentality to a more balanced approach, investors who reallocate risk toward the Other 493 may unlock alpha in a landscape where diversification is no longer a buzzword but a necessity.