Mega-Cap Tech Slumps as Investors Rotate Into Broader Market Leadership, Raising the Question: Breakdown or Risk-On?

Price Action & Underperformance: The Magnificent Seven (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, Meta) have recently lagged the broader market. After a blistering first-half 2023 rally, these giants began losing steam in late-2024, falling from their peaks while the rest of the market climbed. For example, from the mid-July 2024 market top to early September, tech stocks dropped about 8.5% versus a mild 1.6% dip in the overall market – a clear reversal of leadership (4). By early 2025, the Mag7’s dominance had visibly waned, with their lofty valuations inviting profit-taking and rotation (1). This underperformance is stark given that earlier in 2023 the S&P 500’s gains were almost entirely driven by those seven stocks. Now, equal-weighted indexes and previously lagging sectors have begun outperforming. Analysts note that the big AI/tech names that led the prior rally are now “dragging the market down” as money rotates out (4). In short, price action confirms a relative decline in mega-cap tech: while not a crash, these stocks are no longer the sole drivers of market gains – a pivotal change in market character.
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Institutional Trading & Fund Flows: There is strong evidence that big money has been rotating out of the Mag7 and into other areas. Hedge funds, for instance, trimmed their exposure to the AI-focused mega-caps in Q2 2024, just in time to sidestep the summer pullback in those names (3). Goldman Sachs prime brokerage data showed hedge fund positioning in the Mag7 at one-year lows by mid-2024, as managers took profits on crowded tech trades. Simultaneously, these funds have been adding exposure to mid- and small-cap stocks – Goldman’s August 2024 “Hedge Fund Trend Monitor” highlighted that hedge funds became overweight small- and mid-caps (relative to benchmarks) for the first time in over a decade (3). In addition, they “traded in” some of their blue-chip tech holdings for positions in financials, healthcare, and utilities sectors (3), signaling a broad rotation into value and cyclicals.
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Fund flow data reinforces this trend: investors are reallocating capital rather than exiting the market entirely. In July 2024, as Big Tech shares stalled, small-cap stock funds saw nearly record-breaking inflows. One week in mid-July witnessed roughly $9.9 billion surge into small-cap equity ETFs and funds – the second-largest weekly small-cap inflow ever recorded (2). This coincided with outflows from large-cap tech funds and ETFs, indicating a deliberate switch. Bank of America’s strategists noted this as evidence that investors were “boosting exposure beyond technology megacaps” and into neglected market segments (2). Such rotation by institutional players and fund flows out of Mag7-heavy vehicles confirm a decisive shift in leadership is underway.
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Broadening Market Breadth & Leadership: Market breadth indicators have flashed positive signals during this rotation, suggesting a healthier market structure. Whereas much of 2023’s rally was infamously narrow – at one point the Mag7 accounted for ~60% of the S&P 500’s year-to-date gains (6) – the latter half of 2024 saw participation widen. In early July 2024, the S&P 500 Equal-Weight index (which strips out the size advantage of mega-caps) had its best two-week stretch relative to the cap-weighted index since 2020 (2). Strategists described it as “the bench of the stock market finally stepping up” – as mega-cap leaders took a breather, many previously underperforming stocks began to rally (2). This improvement in breadth was evident in metrics like new 52-week highs and the percentage of stocks above key moving averages: for instance, by December 2023 the majority of S&P stocks were outperforming, whereas earlier in the year fewer were (6). Sectors outside of tech started shouldering the index higher. Industrials, energy, and consumer discretionary stocks – which had been in the shadow of big tech – became significant contributors to market gains in late 2023 and into 2024 (1). The market’s narrative shifted toward one of diversification and broader participation, rather than a dependence on a few glamour stocks (1). This rotation “beyond the S&P 7” toward the “other 493” stocks marks a regime change in leadership. Such improvement in breadth confirms that investors are rotating within equities (from one group to another), rather than all running for the exits. In summary, multiple lines of evidence – price relative weakness of Mag7, institutional positioning, fund flows, and breadth metrics – all confirm a rotation out of the Mag7 is occurring.

Evidence of a Broad Market Breakdown: Some analysts caution that the sell-off in mega-cap tech could foreshadow broader weakness. The concern is that these seven stocks had become so dominant that their decline might drag down indices and dent investor confidence across the board. Indeed, entering 2024 the market was extremely top-heavy – the Magnificent Seven made up nearly one-third of the S&P’s market cap, an historic concentration (6). By February 2024, as the S&P 500 notched fresh highs, fewer and fewer stocks were participating: only ~62% of large-cap stocks were above their 50-day averages, down from 87% in December (6). The breadth was narrowing again, and the 10-day average of new highs on NYSE/Nasdaq sank to its lowest level since mid-2023 (6). Such fragile breadth meant the rally could easily crack if the leaders fell. “We are at a historic extreme in the amount of money in a very small number of stocks,” noted one portfolio manager, warning that any stumble by the giants could trigger a swift market pullback (6). This scenario seemed to materialize in late 2024: despite the mid-year surge in smaller stocks, by autumn the entire market hit turbulence. A spike in bond yields (the 10-year Treasury approached 5% in Sept-Oct 2024) raised the cost of capital and put pressure on equities broadly. Small caps, which had briefly led, suddenly reversed – the Russell 2000 Index gave up its summer gains and by December 2024 had slid over 10% from its high, entering a correction (7). In fact, after the Federal Reserve’s first rate cut in November, small-cap stocks initially rallied but then fizzled out as investors questioned the economic outlook and saw less-immediate relief in financing costs (7). The iShares Russell 2000 ETF (IWM) saw $2.6 billion in outflows over just five trading days in one late-2024 episode – the fastest exodus in nearly three years – indicating some fast-money investors abruptly unwound the small-cap rotation (7). Meanwhile, volatility spiked intermittently (the VIX jumped to ~27 in one August session, from the mid-teens, on a growth scare), and defensive assets caught a bid. By early 2025, cash levels were elevated – U.S. money market fund assets hit record highs above $6.5 trillion – suggesting many investors preferred sitting on the sidelines with 5%+ yielding cash rather than fully rotating into stocks. All of these signs underscore a bearish case: that the Mag7 retreat might be the first crack in a broader market breakdown, especially if economic or earnings data were to deteriorate. If the famed leaders continue to falter and the anticipated “handoff” to other stocks fails (e.g. due to rising recession risks or credit stress), the entire market could roll over. Simply put, a failed rotation – where money leaves the winners but then also exits the new leaders – would result in a more significant market decline. Traders should not dismiss this risk: the ability to deflate a “bubble” in big tech “without igniting a much larger selloff” is historically rare, as one strategist observed (2). The bear caseremains that weakness at the top could spread if macro conditions turn unfavorable.
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Evidence of a Risk-On Rotation (not a Collapse): Despite the cautions above, the prevailing evidence leans toward a risk-on rotation rather than an imminent market breakdown. The very fact that secondary stocks and sectors have been rallying while mega-caps stumble indicates that investors are still putting money to work in equities – just in different places. In mid-2024 when the Magnificent Seven stalled, we saw indexes still climbing on the strength of cyclicals and smaller companies. For example, on July 12, 2024, the Nasdaq 100 and S&P 500 slipped as Apple, Nvidia, and Microsoft sold off – yet that same day the Russell 2000 surged over 3%, and the broader market hit a record high, thanks to enthusiasm for Fed rate cuts and improving breadth (5). Rather than a rush to cash, investors rotated into groups that were more sensitive to economic growth and lower valued. This is classic “risk-on” behavior: willingness to buy more volatile small-caps and cyclicals signifies investor confidence in the economic outlook. Bank of America analysts noted that corporate earnings were starting to broaden out beyond Big Tech – exactly what you’d hope to see if a bull market is becoming more sustainable (5). Indeed, as the Fed’s tone shifted from tightening to potential easing in late 2023, high-duration tech stocks became less uniquely attractive, and previously neglected sectors caught a bid. Valuations were a big driver – by mid-2024 many AI-driven mega-cap stocks were arguably overextended, trading at hefty multiples, whereas entire segments of small-cap and value stocks were at decade-low relative valuations (4). This created a ripe setup for a rotation of capital: investors recognized the valuation gap and started repositioning for a more balanced market. Strategists at Morningstar pointed out that earlier in 2024, value stocks and small-caps had reached unusually cheap levels versus large growth stocks, prompting savvy investors to rotate into those undervalued areas (4). As a result, value sectors (financials, industrials, healthcare, consumer staples) began to outperform and “support the market” while growth sagged (4). In other words, the bull market didn’t die when the Mag7 faltered – it broadened out. The S&P 500 remained near all-time highs into late 2024 despite the mega-caps cooling off, a sign that fresh leadership had taken up the slack (1)(4). This kind of rotation is typically constructive for the longevity of a market rally, as it prevents over-concentration and allows new winners to emerge. Market historians note that early-stage Fed easing (absent a recession) often propels smaller and riskier stocks – exactly what we observed as rate-cut expectations grew (2)(5). The persistent bid under cyclicals and the resurgence of previously “left behind” stocks suggests that investors are positioning for continued economic growth and a “soft landing,” rather than fleeing to safety. In short, the current evidence tilts towards a risk-on rotation: capital is staying in equities and seeking higher returns in new places, rather than exiting en masse. As long as the economy and earnings backdrop remain positive, this rotation can be self-sustaining and mark the next leg of the bull market rather than the end of it.

Small Caps & Value Stocks: Perhaps the clearest shift has been into small-cap equities and traditionally “cheap” value plays. U.S. small-cap indices vastly outperformed in mid-2024 when rotation momentum picked up – e.g. the Russell 2000 jumped ~11% in July 2024, handily beating the S&P 500 over that stretch (2)(3). Small caps, often a barometer of domestic economic optimism, had been laggards for years; by 2024 their valuations (e.g. price-to-earnings ratios) were at extreme discounts to large caps. That set the stage for a powerful catch-up rally once investors believed the Fed was pivoting. We saw massive inflows into small-cap funds (2) and notable outperformance of value-factor indices. In addition to the U.S., international small-caps also drew interest (1), but the main story was investors rediscovering domestic small companies. These stocks tend to do well when interest rates stop rising (or fall) and when recession fears abate – precisely the scenario unfolding as inflation cooled and the Fed neared rate cuts. Value stocks more broadly (not just small caps) have also benefited. Sectors stuffed with low-PE, dividend-paying names – like financials, energy, utilities, and staples – have seen relative strength as high-flying growth names came back to earth. The valuation gap between growth and value that peaked in 2023 started to narrow in late 2024, as evidenced by value-oriented indices outperforming. Investors seeking “untapped potential and more attractive valuations” rotated into these laggards (1). Small-cap valuestocks sit at the intersection of this trend, and indeed many portfolio managers began explicitly overweighting small-cap value for 2024–2025. This renewed interest is further fueled by structural tailwinds: for example, U.S. onshoring and infrastructure spending are expected to especially help smaller domestic companies (3). All told, capital is moving into small and value names as investors position for a more broad-based, value-driven market regime.
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Industrials & Financials: Industrial stocks have emerged as a major rotation winner. The industrial sector (machinery, manufacturing, aerospace, transportation, etc.) has enjoyed strong earnings and order backlogs, yet lagged during the tech-led phase – making it a prime candidate for rotation. In 2024, industrials became one of the best-performing groups outside of tech (1). Investors are drawn by both cyclical and secular themes: a robust U.S. capital expenditure cycle, government infrastructure programs, and reshoring initiatives are providing multi-year growth opportunities for industrial companies (3). Notably, strategists have flagged industrials as a sector that could thrive regardless of political shifts or even amid a tech slowdown, due to this tangible demand (3). Hedge funds and mutual funds responded by adding to industrials; by mid-2024, many funds had their highest industrials exposure in a decade (3). Likewise, financials (especially banks) are seeing capital rotate in. Financial stocks were beaten down in 2022–2023 (exacerbated by a scare in regional banks), but they stand to gain from a steepening yield curve and an economic rebound. As the Fed shifts from raising to cutting rates, banks’ operating environment typically improves (loan growth stabilizes and net interest margins stop compressing). In fact, Goldman Sachs noted that hedge funds became overweight the financial sector in 2024 for the first time since 2010 – a remarkable shift in sentiment (3). Large-cap banks and diversified financial firms have been attracting investors looking for value: many were trading near book value with attractive dividends, a stark contrast to pricey tech. The rotation into financials also extends to insurance and credit companies that do well when rates are high but stable. By late 2024, the financial sector was outperforming the S&P 500 and helping to lead rallies on many days when tech sagged. This indicates a real changing of the guard. The bottom line is that money is flowing into industrial and financial stocks, reflecting confidence in economic durability and an appetite for lower-valuation cyclicals. These sectors provide classic “late-cycle” leadership in a market that is rotating to risk-on.
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Consumer Discretionary: Outside of the tech-heavy FAANG names, investors have also been rotating into consumer-focused cyclicals. The consumer discretionary sector covers retailers, travel & leisure, auto manufacturers, apparel, restaurants, and more – many of which were initially left behind as mega-cap tech soared. In 2023, discretionary stocks actually quietly did well (thanks to names like Amazon and Tesla), but a lot of sub-sectors (brick-and-mortar retail, specialty retail, etc.) remained lackluster. That started to change as 2024 progressed: with inflation easing and unemployment low, the U.S. consumer proved resilient, encouraging traders to snap up beaten-down consumer names. Brick-and-mortar retail stocks and certain e-commerce names saw renewed buying on the idea that consumer spending would rotate back to goods and services as pandemic savings normalized. Travel and hospitality companies (cruise lines, airlines, hotels) also experienced strong bookings and became rotation targets – their stocks climbed as investors shifted from growth-at-any-price to growth-at-a-reasonable-price plays. For instance, cruise line equities doubled off their 2022 lows as demand returned. Housing-related stocks (homebuilders, appliances, home improvement retailers) surged as well, despite higher mortgage rates, indicating investors betting on a soft landing for the economy. Consumer discretionary is a broad category, and not all of it saw inflows – notably, hedge funds actually trimmed some exposure to the sector by mid-2024 (taking profits in segments that had run up) (3). But overall, we’re seeing capital rotate into select consumer cyclicals that benefit from robust consumer health. Even as the Mag7 faltered, sub-sectors like luxury goods, travel, quick-service restaurants, and housing suppliers attracted interest. This suggests investors are embracing cyclical consumer stocks in anticipation of continued economic growth and possibly lower interest rates boosting big-ticket consumption (5). In summary, money is finding its way to consumer discretionary plays that were previously overshadowed by tech, adding another engine to the market’s advance.
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Energy & Materials: Energy stocks have reentered the spotlight as well. After a lackluster first half of 2023, the energy sector gained traction later in the year with oil prices rebounding. By early 2024, many energy names (oil & gas producers, refiners, oilfield services) had strongly outperformed the broader market as OPEC+ production cuts and geopolitical factors tightened supply. Investors rotated into energy both for value and defensive reasons: these stocks were trading at low earnings multiples and offered high free cash flow yields (attractive in a high-rate environment), and they also serve as an inflation hedge. Notably, the FTSE 100 in the UK – heavily weighted in energy – rallied to near all-time highs in 2023, buoyed by oil majors and miners (1). This global context showed that money was flowing to energy as a play on commodity inflation and geopolitical uncertainty. In the U.S., energy became one of the top-performing sectors in the latter half of 2024, contributing significantly to S&P 500 performance (1). Fund flows into energy-focused ETFs turned positive as investors saw the sector’s earnings remain strong even while tech earnings momentum slowed. Materials stocks(miners, chemicals, metals) have similarly benefited from rotation. Hopes for infrastructure spending, a China economic revival, and continued demand for commodities (like copper for EVs, lithium for batteries, etc.) have spurred interest in materials. These stocks are classic late-cycle performers – they tend to do well when the economy is running hot but inflation is under control. By diversifying into energy and materials, investors are effectively hedging the growth trade: if inflation perks up or if there’s an exogenous shock (like supply disruptions), these stocks could outperform. The rotation into these sectors underscores a desire for tangible asset exposure. It’s also worth noting that both energy and materials are relatively small portions of the index (compared to tech), so incremental inflows can move them significantly. We’ve observed multi-year funds flow out of fossil fuel sectors reverse somewhat in 2023–24, as the reality of persistent oil & gas demand set in. In conclusion, capital has been rotating into energy and materials as part of the broader shift – seeking low valuations, inflation protection, and exposure to the real economy’s supply side.
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Healthcare & Staples (Value/Defensive Hybrids): Another destination for rotated capital has been the defensive-value sectors like healthcare and consumer staples. These sectors offer a mix of stability and value, making them attractive in a late-cycle rotation when pure growth is out of favor but investors still want equity exposure. Healthcare stocks (pharmaceuticals, biotech, medical devices, health insurers) underperformed tech in early 2023, leaving many trading at reasonable valuations (some big pharma names had dividend yields higher than the 10-year Treasury at one point). As the Mag7 rally cooled, investors rotated into healthcare, drawn by its resilient earnings and lower price multiples. Hedge funds notably added to healthcare in 2024 – it became one of their favorite sectors (3). This helped lift healthcare indices; by late 2024, healthcare was outperforming the broader market. Companies in this space also carry defensive characteristics (people need medications and care in any economy), which appealed to those wary of a potential downturn, yet they also held upside given how oversold some had become. Similarly, consumer staples (food, beverage, household product companies) attracted flows. Staples had been relatively weak when high-growth tech was dominating (investors weren’t interested in slow-growing soup or soap makers), but that changed as the market broadened out. Their steady cash flows, pricing power amidst inflation, and dividends became desirable again. In the UK, for example, consumer staples were a key driver of the FTSE’s strength as global investors sought defensive plays in 2023’s uncertain environment (1). In the U.S., staples started to base and climb in late 2023. Morningstar reported that value stocks among healthcare and consumer defensive sectors were actively supporting the market rallyonce the rotation out of tech began (4). This underscores that the rotation isn’t purely into high-octane cyclicals; it’s also into neglected defensive names that present good value. Essentially, investors rotated from expensive defense (mega-cap tech, which paradoxically had become “safety stocks”) into cheap defense (staples, pharma) – a logical value trade. The net effect is that healthcare and staples provided a floor for the market, absorbing some of the capital coming out of tech. These sectors now serve as a hybrid play: they offer some protection if the economy slows, but also room for upside as their valuations normalize. Capital flowing their way confirms a more balanced approach in portfolios as the era of all-in tech leadership wanes.
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Fed Policy & Interest Rate Expectations: The Federal Reserve’s stance has been a critical catalyst. In late 2022 and early 2023, rapid rate hikes lifted bond yields sharply, undermining high-growth tech valuations (the present value of their future earnings fell) and eventually setting the stage for rotation.
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By mid-2023, with inflation showing signs of cooling, investors began to anticipate the end of Fed tightening. This was a key turning point: as soon as the market started pricing in the peak in rates (and eventual rate cuts), the relative outlook for different sectors shifted. Interest-rate-sensitive stocks – notably small-caps (which often carry more floating-rate debt) and cyclicals like housing – rallied on the idea that borrowing costs would come down (5). Indeed, the mere hint of future rate cuts in mid-2024 sparked rallies in those segments.
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By July 2024, markets were confidently expecting the first Fed cut by that fall; CME FedWatch odds for a September cut shot above 90% after a cooler inflation report (5). This boosted risk appetite dramatically. Tech stocks actually took a backseat because they had already run up on falling inflation, and now it was the economically sensitive stocks’ turn to shine. In late 2024, the Fed did begin cutting rates (implementing a total of 100 bps of cuts by year-end 2024). That confirmed the regime change and lent support to financials (improving yield curve) and small-caps. However, the Fed also signaled it would cut only gradually (foreseeing maybe only ~50bps more in 2025), which tempered some enthusiasm and contributed to volatility – e.g., when the Fed indicated “higher for longer” in early 2024, small-cap rotations paused (6).
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Going forward, Fed policy remains a swing factor: a faster easing cycle would likely accelerate the rotation into risk assets (small-caps historically outperform following initial rate cuts, absent a recession (2)), whereas any hawkish surprises (or a halt in cuts) could hurt these newly leading sectors first. Swing traders are closely watching Fed communication because it often triggers sector rotations overnight. In summary, the expectation of an easier Fed policy has been a tailwind for rotating out of mega-cap growth and into stocks that benefit from lower rates (or were punished by higher rates).
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Inflation Trends & Economic Growth Outlook: Inflation’s trajectory has heavily influenced investor positioning. The Magnificent Seven were partly bid up as an inflation refuge (they had strong pricing power and secular growth), whereas many value stocks were sold off in 2022’s inflation spike. As inflation has come down from 40-year highs, that narrative shifted. By mid-2024, inflation (CPI) had cooled considerably – even showing an outright monthly decline in June 2024 (5) – boosting hopes that the Fed could stop tightening. This cooling inflation provides a more benign backdrop for interest-rate-sensitive and low-margin businesses (like small manufacturers or retailers) which were squeezed by rising costs. Additionally, real consumer incomes started rising again as wage growth outpaced inflation, supporting cyclical sectors. Meanwhile, the economic growth outlook has remained surprisingly resilient. Throughout 2023-2024, the U.S. economy avoided recession despite aggressive rate hikes. By late 2024, GDP growth was solid (Q3 2024 saw ~4.9% annualized growth) and unemployment remained low. This “Goldilocks” mix – inflation easing without choking off growth – is ideal for a risk-on rotation. It gives investors confidence to venture into smaller companies and cyclical industries on the premise that a soft landing is achievable. In fact, by late 2024 a consensus began to form that a recession in 2025 was unlikely, with many economists projecting moderate growth ahead (4). That sentiment shift has been crucial: if investors believe the economy will keep expanding (even at a slower rate), they are more willing to buy economically sensitive stocks that were priced for disaster. Stronger economic data has at times caused knee-jerk declines in tech (on fears the Fed would stay hawkish) but has generally propelled value/cyclical shares (which need growth to succeed). Corporate earnings have also started to broaden out beyond tech. For example, energy, industrial, and financial companies posted robust earnings in 2H 2024, while some Big Tech earnings were mixed – this relative fundamental performance supports the rotation case. It’s also worth noting that global growthdynamics play a role: China’s stimulus efforts and Europe’s recovery have improved the outlook for international stocks, drawing some money away from U.S. mega-caps into foreign equities (1). Overall, the improving inflation and steady growth outlook has shifted market leadership toward those stocks that thrive in a non-inflationary expansion, thereby accelerating the rotation out of the Mag7.
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Credit Conditions & Market Volatility: Credit conditions influence where investors put money within equities. When credit is tight (higher borrowing costs, stricter lending), small-caps and highly leveraged companies suffer, and investors prefer the cash-rich mega-caps. This was the case in 2022-early 2023. However, as rate hike pressures have eased, we’ve seen credit conditions stabilize. The bank lending turmoil from early 2023 (regional bank failures) subsided after swift action, and by late 2024 banks were generally on firmer footing. If the Fed is cutting rates, it typically loosens overall financial conditions – evidenced by narrower credit spreads and more ample liquidity. Indeed, high-yield bond spreads in late 2024 compressed to relatively low levels, indicating the bond market expects fewer defaults and is more risk-on. This environment is supportive of smaller companies, which rely on functioning credit markets to finance growth. Investors monitor measures like the Chicago Fed’s Financial Conditions Index, which has eased considerably from its 2022 tightness. Additionally, the steepness of the yield curve is key: it had been inverted (a bad sign for banks and a recession predictor), but with Fed cuts, the curve has started to re-steepen, alleviating pressure on financials. As financing becomes more available/cheaper, sectors like housing, autos, and small industrials get a boost – encouraging rotation into those equities. On the volatility front, overall market volatility has been relatively low by historical standards aside from a few spikes (the VIX largely ranged in the mid-teens for much of 2023-24). Lower volatility generally emboldens investors to take on more risk, aiding the rotation to high-beta sectors. However, when volatility did spike – such as August and October 2024 during macro scares – we saw the rotation trade wobble (money briefly flowed back into mega-cap “safe havens” or even out of equities). Notably, one of the largest one-day VIX jumps ever occurred in Aug 2024 (~+65% in a day to over 27) on a growth scare, which momentarily sent small-caps tumbling (7). Yet these bouts proved short-lived and were viewed as buying opportunities for those rotation names. Sentiment indicators show that investors’ fear of missing out on the next rally in undervalued stocks has often overtaken their fear of a market crash. Still, sentiment can be fickle: if volatility were to persistently rise (say due to a geopolitical event or credit scare), the appetite for small-cap/value stocks could diminish, and investors might retreat to mega-cap quality or cash. In essence, benign credit and volatility conditions have greased the wheels of this rotation. Traders should keep an eye on credit spreads, bank lending surveys, and the VIX – any severe tightening or volatility shock could pause or reverse the rotation trend.
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Investor Sentiment & Positioning: The rotation is also fueled by a psychological and positioning shift. By mid-2023, many investors were extremely overweight big tech and underweight everything else – a crowded trade that left other sectors starved of capital. As performance started to broaden, sentiment followed suit. Surveys (like Bank of America’s fund manager survey) in late 2024 showed a big jump in respondents expecting small-caps and value to outperform, a drastic change from earlier in the year. The concept of a “Great Rotation” became a talking point on trading desks (4). Once a few high-profile investors and strategists successfully rotated early (taking profits in tech and buying cyclicals), it built confidence for others to do the same. The idea that “the market rally can continue without the Mag7 leading” gained traction (9). Moreover, the fear of missing out (FOMO) started to apply to the new winners: fund managers didn’t want to be caught clinging to yesterday’s trade (mega-cap tech) while the next rally stage (in small caps, etc.) took off without them. This sentiment shift is self-reinforcing – as more money rotates, those new areas outperform, drawing in even more followers. We also saw the rebalancing effect: by mid-2024, many portfolios were so skewed by tech’s rise that rebalancing mandates triggered selling of winners and buying of laggards (2). This technical flow added fuel to the rotation. Finally, option market activity suggested traders positioning for more upside in cyclicals: call option volumes spiked on small-cap and industrial ETFs in 2H 2024, while call buying on tech names cooled. All these sentiment and positioning factors contributed to a tailwind for rotating out of the Mag7 and into other stocks.