The Great Market Rotation: Beyond the Magnificent 7
Market rotation is healthy. Just don’t expect a smooth ride.
For most of the past three years, the U.S. stock market behaved like a one-horse show. A small group of mega-cap stocks carried both the S&P 500 and the Nasdaq higher, better known as the Magnificent 7. Nvidia became the symbol of the entire market cycle. The gains were extraordinary. At the same time, concentration risk quietly built beneath the surface.
Over the past six weeks, that leadership finally cooled. Following Bitcoin’s sharp 30% October pullback and Nvidia’s roughly 14% decline from its November peak, several Mag-7 names stalled. Yet the market did not break. The S&P 500 held firm. Small and mid-cap stocks moved higher. Industrials, financials, and other sectors quietly picked up the baton.
That is not a warning sign.
That is a healthy rotation.
The era of easy income is ending
Last week’s rotation out of mega-cap technology, punctuated by weakness across parts of the Magnificent 7 and volatility in more speculative corners of the market, was not a breakdown. It was a handoff. Leadership is broadening after several years of narrow dominance, and that matters far more than any single stock pulling back. This is not 1999. It is a market growing up.
It is also not 1981. The brief window of effortless yield from cash and CDs is fading, even if interest rates remain elevated. Cash feels safe, but safety can be deceptive when purchasing power, reinvestment risk, and opportunity cost quietly re-enter the picture. With inflation expectations contained and the Federal Reserve nearing the end of its easing cycle, the next phase of this market is likely to reward balance, diversification, and discipline more than momentum or concentration.
Bull markets don’t die because of old age
In our quarterly client review meetings, we often remind investors that bull markets do not end because of headlines, bad news, or simply getting “old.” They end because of excess as we recently discussed in our newsletter from Ai Fears to Market Exuberance: Excess valuations (1987). Excess leverage (2008). Excess speculation (200o).
That distinction matters right now. A period of cooling in technology leadership is healthy unless you are over-concentrated in a handful of stocks with your life savings. Markets that rotate are markets that are functioning.
This is also a good moment to remember why discipline pays. Over the past twelve months, investors who stayed invested in diversified portfolios were rewarded far more consistently than those chasing headlines or guessing the next hot trade. Behavior matters as much as the market itself. Many investors do more damage to long-term returns through short-term market timing than through any actual downturn.
History does not repeat with precision, but it does rhyme. Bull markets tend to last far longer than bear markets, often stretching five to nine years. Staying disciplined through periods of noise, rotation, and volatility has rewarded patient investors across every cycle.
The excess is draining. Income is beginning to matter again.
And markets are quietly signaling that leadership, returns, and risk are about to look different than they have over the past few years.
The AI capex cycle is real and it matters
One reason this The Great Market Rotation feels different is the scale of the AI buildout. This is not a typical tech cycle. It is an infrastructure cycle, and it is capital intensive.
Research from the Financial Times and The Wall Street Journal shows hyperscalers are on pace to spend roughly $350B in 2025 on data centers, chips, networking, power, and cooling. Projections push that figure toward $400B in 2026, with cumulative AI-related investment expected to approach $1T by the end of next year.
That spending is real. So are the long-term opportunities. But the market is adjusting to a new reality. Big Tech is no longer operating under a “spend little, earn lots” model. AI requires sustained capital outlays, longer payoff periods, and closer scrutiny of free cash flow.
This is where discomfort enters. Some of that spending hits traditional capex. Some shows up in leases and long-term commitments. Some compresses margins. Investors are no longer grading these companies only on growth. They are grading them on capital discipline.
You also hear more discussion about “circular” ownership. When a handful of companies dominate index weights, they effectively own each other through passive flows, buybacks, and institutional cross-holdings. This is not dot-com 2.0. The earnings are real. The balance sheets are stronger. But self-reinforcing trades feel less stable once expectations begin to shift.
That tension is not bearish. It is maturation.
When leadership broadens, risk actually falls
Markets love to talk about money “flowing” from one sector to another. In reality, we do not see intent. We see prices adjust after positioning becomes crowded.
This is exactly what veteran strategist Ed Yardeni has been highlighting. After 15 years of favoring Technology, he recently said concentration risk has simply become too high. Not because AI is fading. Because when everyone owns the same trade, the upside shrinks and the downside grows.
A market driven by seven stocks is fragile. A market where the other 493 participate is more resilient. That is how bull markets extend. They rotate. They rebalance expectations. They spread opportunity beyond a narrow group of winners.
AI does not disappear in this process. It diffuses. The next phase often benefits the companies using the tools, not only the companies selling them.
Rotation does not equal recession
The biggest mistake investors make during leadership shifts is assuming they signal economic trouble.
They do not.
Major investment firms are not forecasting a recession as the base case for 2026. JPMorgan, Goldman Sachs, and others continue to describe recession risk as real but modest. JPMorgan’s own research places the probability of a U.S. recession next year in the mid-30% range. That is not zero. But it is not the central forecast.
The macro backdrop looks more like slowing growth than contraction. Inflation cooled without a recession. The labor market softened without breaking. Corporate earnings remain resilient. This is a very different setup than markets faced in 2000 or 2008.
No big Fed tailwinds coming
At the same time, investors should not expect monetary policy to bail out every wobble.
After multiple rate cuts in 2025, the Fed appears close to the end of this easing cycle. Current projections across Wall Street suggest only one additional rate cut in 2026. That helps. It does not ignite another liquidity-driven surge.
Rates are restrictive but stable. Financial conditions are no longer tightening aggressively, but they are not loose either. That means markets will have to do more work on their own. Earnings growth, productivity gains, and valuation discipline will matter more than policy support.
The behavioral trap
Here is where behavior matters.
Investors anchor to what worked. They grow uncomfortable when leadership changes. They confuse volatility with danger. They expect calm markets simply because the macro story feels mostly fine.
That expectation is the real risk. Rotation is healthy, corrections are normal, and expectations matter more than headlines.
Expect normal drawdowns
History is clear. Even strong bull markets experience meaningful pullbacks. On average, stocks suffer a drawdown of roughly 14% at some point during a year. A decline of about 10% is typically labeled a correction, while drops beyond 20% are considered bear markets.
These moves do not require recessions or crises. They occur during economic expansions, when inflation is falling, and even in years when growth remains intact. Volatility is not a signal of failure. It is part of how markets reset expectations and sustain longer-term advances.
Expecting 2026 to be different because seasonality looks favorable, inflation cooled, rates may drift lower, taxes are unchanged, or even because the Eagles might win another Super Bowl is unrealistic.
Volatility is the admission price for long-term returns.
Bottom line: The Great Market Rotation is doing what strong bull markets are supposed to do. Leadership is rotating instead of breaking. Breadth is improving instead of narrowing. The economy is slowing without slipping into recession. Monetary policy is supportive but no longer a tailwind you can lean on.
That combination rarely feels comfortable. It rarely rewards performance chasing. And it almost always punishes investors who confuse normal drawdowns with structural risk.
The mistake is not staying invested.
The mistake is being positioned so volatility forces bad decisions.
Broad diversification matters more after periods of narrow leadership. Rebalancing matters more after outsized gains. Discipline matters more when the macro story feels “good enough.”
This is not a market to abandon risk.
It is a market to manage it.
For more information on our firm or to request a complimentary investment and retirement check-up, call (561) 210-7887 or email jon.ulin@ulinwealth.com.
Author: Jon Ulin, CFP® is the founder and Managing Principal of Ulin & Co. Wealth Management, an independent advisory firm based in South Florida for over 20 years. As a fiduciary wealth advisor, Jon helps successful individuals, families, and business owners nationwide with multi-generational planning, investment management, and retirement strategies. Learn more about Jon and our team at About/CV.
Note: Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Information provided on tax and estate planning is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
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