“After 15 years, the playbook needs a refresh.” That’s the tone from Yardeni Research this week as the firm advises investors to dial back the long-running overweight in U.S. tech and communication-services stocks — the so-called Magnificent Seven era — and shift toward a broader, less top-heavy S&P 500 allocation.
Yardeni’s point is simple and blunt: what worked spectacularly well is now a source of concentrated risk. Information Technology and Communication Services together account for roughly 45.2% of the S&P 500’s market capitalization and nearly 38.6% of its forward earnings — record highs. When two sectors dominate an index to that degree, a portfolio’s volatility no longer looks like a diversified equity bet; it looks a lot like a concentrated bet on a handful of mega-cap franchises.
A practical rebalancing roadmap
The recommendation isn’t to abandon tech or to wager against AI. Instead, Yardeni suggests moving those two sectors from overweight to market-weight and redeploying capital into areas investors have consistently underowned:
- Financials — currently about 13.0% of market cap but punching above their weight on earnings (18.4%) — where interest-rate dynamics and cyclical recovery can help earnings catch up.
- Industrials — roughly 8.0% of market cap and 7.7% of earnings — a classic value tilt if global capex and supply-chain reshoring persist.
- Health Care — underweighted historically, yet representing about 11.9% of forward earnings versus a 9.9% market-cap share.
That tilt toward Financials, Industrials and Health Care is a reassertion of diversification: smaller sector bets that can trim headline risk if a handful of megacaps stumble.
Why now? Growth moderation and competitive diffusion
Yardeni’s timing rests on two connected ideas. First, the outsized earnings leadership of the Magnificent Seven looks more likely to moderate than to accelerate indefinitely. Competitive pressures — from both incumbents and fast-moving startups — plus regulatory scrutiny and valuation fatigue, all argue against a straight line of mega-cap dominance.
Second, the technological advantage that concentrated these gains is spreading. Big models, cloud tools and generative-AI features are proliferating across industries. Microsoft’s own moves into in-house generative models are a reminder that AI capabilities are becoming a standard toolkit, not a proprietary moat for a single cluster of names (Microsoft Unveils MAI-Image-1, Its First In‑House Text‑to‑Image Model). Similarly, Google’s push to fold its Gemini Deep Research into Gmail and Drive signals a diffusion of advanced AI into everyday productivity — which narrows the performance gap between a few AI leaders and the broader market (Gemini Deep Research Plugs Into Gmail and Drive). Even Apple is expected to lean on external models for Siri upgrades, illustrating how major ecosystems are integrating third-party AI rather than hoarding exclusivity (Apple to Use a Custom Google Gemini Model to Power Next‑Gen Siri).
Those moves matter because they change where future earnings growth might concentrate: across more companies, across more sectors, and across more countries.
Don’t overreact — rebalance thoughtfully
A pragmatic takeaway for portfolio managers and individual investors is to rebalance deliberately rather than impulsively. Reducing a tech overweight to market-weight can be done gradually, harvesting gains and rotating into underowned sectors. That approach keeps exposure to secular winners — AI, cloud, platform businesses — while reducing single-point failure risk.
Yardeni also questions the long-held preference for overweighting the U.S. in global portfolios, noting stronger international earnings prospects, cheaper valuations abroad and a dollar that’s not guaranteed to keep strengthening. For investors who have been U.S-heavy since 2010, that’s a reminder to review geographic bets as well as sector bets.
There are costs to every stance. If the megacaps keep running, trimming them can feel painfully contrarian. But Yardeni’s argument is about balance: preserve exposure to innovation, but don’t let a few giants define the whole ride.