Magnificent 7 Tech Stocks Underperform S&P 500 as Market Broadens in Early 2026

The Magnificent 7 technology stocks have underperformed the S&P 500 in early 2026, marking a shift in investor sentiment. For the first time since 2022, most of these tech giants did not outperform the broader index in 2025. The recent underperformance has raised questions about the sustainability of their earnings growth and the value of heavy artificial intelligence investments.

In 2026, the Magnificent 7 index rose just 0.5%, while the S&P 500 climbed 1.8%. This suggests a broadening of market leadership. Previously, the tech giants drove the majority of the S&P 500's gains, but this dynamic is shifting as investors explore other opportunities.

Analysts have noted that the valuation multiples for the Magnificent 7 have declined, making them relatively less expensive compared to earlier in the decade. The index is trading at 29 times forward earnings, while the S&P 500 trades at 22 times.

Why the Move Happened

Profit growth for the Magnificent 7 is expected to climb by 18% in 2026, the slowest pace since 2022. This is slightly ahead of the 13% projected for the other 493 companies in the S&P 500. The slower growth has led to a more balanced distribution of earnings across the index.

Investor enthusiasm for the Magnificent 7 is cooling as the rest of the S&P 500 becomes more attractive. This shift is partly due to improved earnings growth outside the tech sector and the broader diversification of market opportunities.

How Markets Responded

Small-cap stocks are outperforming large-cap counterparts in early 2026. The Russell 2000 is up 5% for the year, while the Magnificent 7 index is down 0.1%. Small-cap stocks benefit from interest rate cuts and lower valuations, making them more appealing to investors.

The valuations for large-cap stocks have become stretched, with the S&P 500 trading at 22.3 times forward earnings. In contrast, the S&P SmallCap 600 trades at 13.2 times forward earnings, offering a more attractive price-to-earnings ratio.

The shift in market dynamics has also been supported by a rotation of capital into sectors beyond technology. Energy and other cyclical sectors are gaining attention as economic optimism grows.

What Analysts Are Watching

Analysts are watching for further diversification of earnings and continued improvement in non-tech sectors. David Lefkowitz of UBS Global Wealth Management noted that a broadening of earnings growth is already visible and expected to continue.

Wall Street is also monitoring the broader economic environment. A resilient U.S. economy with modest GDP growth forecasts supports continued corporate profitability. However, the impact of fiscal policies and regulatory changes remains a factor.

Investors are also evaluating the long-term impact of artificial intelligence investments. While these investments have driven growth in recent years, questions remain about their return on investment and sustainability.

The performance of small-cap stocks and the broader market diversification could influence investor strategy. Jack Janasiewicz of Natixis Investment Managers Solutions advised that a diversified approach may be necessary, as a one-size-fits-all strategy may not be effective.