Mega-Cap Stocks Drag Down Market in Q1

The first quarter of 2025 has been a tumultuous period for the US stock market, with mega-cap tech stocks leading the charge downward. The Magnificent Seven—Meta, microsoft, nvidia, apple, Alphabet, Amazon, and Tesla—have struggled, with only meta seeing year-to-date gains. This underperformance has had a ripple effect, dragging down the broader market and causing investors to rethink their strategies.

The primary culprit behind the underperformance of these mega-cap stocks is the lagged impact of a strong dollar in the fourth quarter of 2024. A strong dollar makes US goods and services more expensive for international buyers, thereby reducing the earnings potential of these companies. This, coupled with concerns over US tariffs and China's growing momentum in the AI race, has led to a weekslong sell-off in these stocks.



The market's reaction to this underperformance has been swift and significant. Investors have begun to rotate their capital towards international markets, particularly Europe, as the high-quality leadership cohort of the US equity market began to underperform. This shift is evident in the recent declines in the US dollar, which has historically had a positive impact on US corporate earnings. The US Dollar Index, which measures the value of the greenback against a basket of other major currencies, traded around 104 on Monday, down around 5% from a peak of 109 in early January. A weaker currency makes US goods and services cheaper for other countries, which is positive for earnings.



Morgan Stanley's chief investment officer, Mike Wilson, and other analysts have noted that "Stronger seasonals, lower rates, and oversold momentum indicators support our call for a tradable rally from ~5500." They also noted that "Mag 7 earnings revisions look like they may be bottoming, which could also support a rotation back to the US." This suggests that the market's reaction to the underperformance of mega-cap stocks has influenced investor sentiment and capital allocation strategies, with a potential for a reversal of the recent downtrend in these stocks leading to a rotation back to the US market.

The underperformance of these mega-cap stocks has also led to a shift in investor focus towards smaller-cap stocks and international markets, which are seen as offering better value and growth opportunities. This rotation is driven by the perception that the US market is losing its leadership position due to the poor performance of these key stocks.

In conclusion, the underperformance of the Magnificent Seven mega-cap stocks in the first quarter of 2025 has had a significant impact on the broader market. The lagged impact of a strong dollar, concerns over US tariffs, and China's growing momentum in the AI race have all contributed to this underperformance. However, there are signs that the market may be bottoming out, with a potential for a reversal of the recent downtrend in these stocks leading to a rotation back to the US market. Investors will be watching closely to see if this trend continues.

Ask Aime: What's behind the underperformance of the Magnificent Seven?