The run may be over for the seven stocks that drove the lion's share of the stock market rally over the past year.
UBS Investment Bank's chief US equity strategist Jonathan Golub downgraded six of the "Magnificent Seven" stocks — Apple (AAPL), Alphabet (GOOGL, GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Nvidia (NVDA) — from Overweight to Neutral in a new research note on Monday.
His call comes as the Magnificent Seven, which also includes Tesla (TSLA), just endured its largest weekly market cap loss in history. All seven of the Big Tech leaders are off their recent highs, a decline punctuated by a 10% single-day drawdown for Nvidia on Friday, its worst one-day price performance since March 2020, though the AI darling rebounded 4% on Monday.
Golub, who rates sectors within the S&P 500 (^GSPC), not individual stocks, remains Overweight on technology outside of the six stocks named in his note.
But for the large companies that have grown earnings significantly over the past year, Golub believes the tide may be shifting and other areas are set to outperform the largest stocks in the S&P 500.
"Our downgrade of the Big 6 — from Overweight to Neutral — is not predicated on extended valuations, or doubts about AI," Golub wrote.
"Rather, it is an acknowledgment of the difficult comps and cyclical forces weighing on these stocks. These forces do not apply to other TECH+ companies or the rest of the market in the same way."
Earnings for the S&P 500 have largely been driven by profit growth at the large tech firms. That's expected to play out again during first quarter reports, with FactSet projecting Amazon, Alphabet, Meta, Microsoft, and Nvidia will combine for earnings growth of roughly 64%. Meanwhile, the other 495 companies in the S&P 500 are expected to report an earnings decline of 6%.
But over the course of the year, this is expected to shift.
Consensus estimates from FactSet show earnings growth for those five companies is set to end the year just shy of 20% year over year in the fourth quarter, reflecting significantly slower growth than their prior pace.
By that point, consensus expects the other 495 companies to grow earnings by about 17% compared with the prior year, a significant uptick from their current growth rate.
"Investors attribute the run in mega cap stocks to animal spirits and the impact of AI," Golub wrote. "However, our work indicates that surging earnings momentum (change in forward growth projections) fueled this upside. Unfortunately, this momentum is collapsing."
Tesla is expected to report quarterly results on Tuesday, with results from Meta, Microsoft, and Alphabet coming later this week.
This shift in where earnings are growing most could be "disruptive in the near term," Golub added.
But given increasing signs that the US economy is growing faster than expected this year, Golub thinks a broadening out in earnings performance over the next year keeps his call for the S&P 500 to end the year at 5,400 in play. The benchmark index closed at 5,010 on Monday.
"This target remains supported by broadly positive fundamentals and a robust economy," Golub wrote.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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