Tech Stocks Have Stumbled. Other Sectors Have Risen. Has That Made the Market Stronger?
Tech Stocks Have Stumbled. Other Sectors Have Risen. Has That Made the Market Stronger?
Colin LaidleyTue, August 11, 2026 at 6:03 PM UTC
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Factors including the U.S. economy’s resilience and an uptick in dealmaking have aided the broadening of market returns.Credit: Nicolò Campo / LightRocket via Getty ImagesKey Takeaways -
The equity market shifted from early- to mid-cycle in recent months as high-flying chip and tech hardware stocks stumbled and investors rotated into “old economy” stocks with durable earnings and free cash flows, according to Morgan Stanley analysts.
Experts say the broadening of earnings growth should support a more resilient stock market going forward, while depressed tech valuations have created opportunities to buy growth stocks at value stock prices.
The bull market that began in late 2022 has in recent months appeared to have run its course. Experts say that may be the opposite of what was happening.
And that could be a good thing. “The U.S. equity market is transitioning from an early- to mid-cycle regime,” wrote Morgan Stanley analysts led by Michael Wilson in a Monday note. “This is a period when leadership shifts from lower to higher quality” as investors put more stock in durable earnings, stable margins and healthy free cash flows. Ultimately, they say, that shift reflects a broadening of earnings growth “that should support greater index resilience as the cycle matures.”
The S&P 500 notched record after record in April and May as AI infrastructure spending and waning war headwinds fueled a blistering chip stock rally, but that came to an abrupt halt in early June. Over the next two months, the index dropped about 1.5% as semiconductor stocks fell into a bear market. Meanwhile, the equal-weight S&P 500 continued to chug along, rising 2.5% over the same period, reflecting strength among the S&P 500’s smaller, less buzzy stocks. According to Goldman Sachs, over June and July, the equal-weight S&P 500 outperformed the more broadly tracked market-weight index by the widest margin since 2009.
Why This Is Important To Investors
Wall Street analysts have been warning about hazardous market concentration for years as they watched mega-cap tech profits and shares leave the rest of the market in their dust. They argue the broadening of both earnings growth and stock performance this year solidifies the foundation of the current bull market and makes it more resilient to shocks.
Several factors have supported the broadening of market returns, according to Goldman, including the U.S. economy’s resilience and an uptick in mergers and acquisitions. But one of the core reasons, experts say, is the surprisingly widespread strength of profit growth.
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“Earnings strength is no longer confined to a narrow group of mega-cap stocks,” wrote Wilson. The median Russell 3000 stock grew earnings by 15% in the second quarter, a five-year high. With most of the S&P 500 having already reported, nearly 90% of the index has topped earnings estimates and the median beat of 6% is nearly two percentage points above the historical average.
Earnings growth has been juiced by what Goldman Sachs calls a capital expenditures “super cycle.” Tech giants are spending hundreds of billions a year on AI infrastructure like chips, networking equipment, and power generators. But it’s not just Silicon Valley that’s building. Both the Biden and Trump administrations have made improving America’s infrastructure and expanding its industrial capacity key priorities. “The spillover effects of this have boosted the growth prospects and valuation of many ‘old economy’ industries” long neglected by investors in favor of tech. As a result, investors are paying more today for industrials, utilities, and value stocks than nearly any other time in the past 20 years.
Meanwhile, they’re paying less for technology stocks. Uncertainty about AI’s impact on the software industry has compressed valuations while ballooning profits have caused hardware and equipment multiples to decline. Granted, one of the reasons hardware stocks have slumped recently is that investors know today’s earnings bonanza can’t last forever. “There does not appear to be a valuation bubble, but there may be an earnings bubble,” wrote Goldman. But, with multiples down across the tech sector despite continued earnings strength, “the opportunity to selectively find value in growth areas is rising,” according to Goldman.
Morgan Stanley’s analysts contend the hyperscalers—Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), and Meta (META)—“offer a better multi-month risk/reward” than semiconductor stocks considering their resilient core businesses, attractive valuations, and possibility of AI-related upside. Outside of tech, they favor companies with durable earnings, robust free cash flows, and a history of operational efficiency.
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Source: “AOL Money”
