Change in leadership

Why the rotation away from the Mag 7 has legs

What a World Cup this has been! Tearful farewells. Stunning upsets. New heroes. Cristiano Ronaldo’s emotional exit from the international stage. Traditional powerhouses like Brazil and Germany knocked out by Norway and Paraguay. And, of course, Canada’s inspiring run to the Round of 16, lifting the national mood in a way few sporting events can.

The lesson is obvious: yesterday’s champions are not guaranteed tomorrow’s success.

Financial markets are telling a similar story. For much of the last decade, the investment playbook was simple: own America’s mega-cap technology stocks. When they rose, the S&P 500 rose with them. When they stumbled, the broader market usually followed. That relationship has begun to break down. The once-vaunted Mag 7 – a useful, if imperfect, proxy for the AI hyperscalers – has struggled this year. The group of seven, as our friends at Deutsche Bank point out, has even managed to underperform one of the year’s worst-performing asset classes: long-dated UK government bonds.

Meanwhile, a very different set of winners has emerged. U..S small cap stocks have delivered their strongest first half in 35 years. Japan has quietly carved out its best quarterly equity performance since 1986. Emerging markets have comfortably outperformed developed markets. Value has beaten growth. Equal-weighted indexes have outperformed their cap-weighted cousins. Even within technology, leadership has begun to broaden beyond the familiar mega-cap names.

To be fair, 2026 has been a messy year. Some of this may simply reflect investors taking profits after an extraordinary run in the Mag 7. And recent leadership hasn’t exactly been easy to decipher. Over the past month, the best performing sectors in the U.S. have been financials, industrials, healthcare, and utilities – two cyclical groups and two defensive ones. Can you see a pattern? Yeah, we can’t either.

But our investment team believes something more important is unfolding. The market no longer needs seven stocks to carry it forward. Leadership is broadening. The opportunity set is widening. And unlike many previous false starts, we believe this rotation has legs.

Here’s why.

The AI story is getting bigger

Much of the recent underperformance in the Mag 7 reflects a simple reality: Investors are becoming more demanding. For the past three years, markets rewarded companies simply for spending aggressively on AI. Today, investors want proof that those investments will generate attractive returns.

That is becoming a much tougher test. Alphabet, Amazon, Microsoft, and Meta continue to pour hundreds of billions of dollars into AI infrastructure. But free cash flow has come under pressure as data centres become more expensive and the costs of memory chips, networking equipment, and power infrastructure continue to climb. All four major hyperscalers reported negative year-on-year growth in 12-month trailing free cash flow in the first quarter.

As we wrote in our February 2026 Ask Forstrong, “Big Tech is no longer an asset-light monopoly franchise. It is now capital-hungry, more competitive and less insulated. Markets assign very different multiples to that kind of business model.”

None of this means the AI story is broken. Far from it. If anything, AI is becoming much bigger than the companies that started it. The market is already rewarding many of the businesses supplying the AI buildout, from semiconductor manufacturers to electrical equipment, power infrastructure and industrial automation.

But history suggests the next phase will look different. Every major technological revolution follows a similar path. First comes the infrastructure. Then come the applications. The internet offers a useful comparison. Cisco built much of the plumbing. But the greatest long-term value accrued to companies like Amazon and Google that found profitable ways to use it.

AI will likely follow the same path. The biggest winners won’t simply build the models. They’ll use AI to improve productivity, lower costs and grow earnings in industries like healthcare, robotics, manufacturing, logistics and defence. That transition won’t happen overnight. There will almost certainly be periods when enthusiasm for AI infrastructure runs ahead of reality – as this year’s parabolic rally in semiconductor stocks reminds us.

But the bigger point remains intact. AI is no longer a story about seven companies. It is becoming an economy-wide investment and capital spending cycle.

The AI race has unleashed one of the largest investment booms of the modern era, rivaling anything seen outside the industrial mobilization of the Second World War. It is fueling a surge in construction, power generation, banking, credit, mergers and acquisitions, equity issuance, and asset management as governments and corporations race to finance the next wave of innovation.

Portfolio Playbook

• Stay invested in AI but broaden exposure beyond the hyperscalers. Look for second-order beneficiaries: companies and sectors applying AI to improve productivity and lift earnings, not just those building the underlying infrastructure.
• Continue owning the global “picks and shovels” of AI, including semiconductor leaders in Taiwan and Korea, but also industrial automation in Japan, and the raw materials like copper companies required to power the buildout.

Next time: Two more reasons this rotation has legs: higher rates and the return of global investing.

Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on X at @TylerMordy and @ForstrongGlobal.

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The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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