US large-cap equities: Staying active in a shifting market

Key takeaways

• Resilient outlook: Innovation and earnings growth are supportive of US large caps, despite policy and tariff risks.
• Active advantage: As the market broadens beyond the Magnificent Seven, active managers are best positioned to find the next winners.
• Artificial intelligence (AI) is accelerating: The pattern of the current AI boom is following previous innovation waves, but at a much faster pace.

Strength amid uncertainty

US equities have delivered impressive gains in recent years, with the S&P 500¹ repeatedly hitting record highs, driven largely by the Magnificent Seven’s dominance in AI. While valuations are elevated, the market outlook remains positive. Innovation and investment continue at a rapid pace, sales growth is accelerating, and earnings are projected to rise into double digits this year.

At the same time, we now have a more business-friendly administration. As always, risks remain, particularly around US trade policy and the potential impact of tariffs on key sectors, such as technology. While the market currently views President Trump’s tariffs as a tactical measure, there is a risk of longer-term disruption, similar to what we saw during his last presidency.

Despite these uncertainties, investor confidence in US equities is unlikely to waver.  Risks may be heightened, but the new administration’s policy changes could ultimately result in long-term positives for the US economy. The technology sector will likely continue to lead, with new opportunities emerging beyond today’s dominant players, as history has shown.

Beyond the Magnificent Seven

While the Magnificent Seven stocks² remain well-positioned for the long term, market leadership is set to broaden as innovation accelerates.

Periods of technological transformation often separate winners from those unable to adapt. The early days of mobile and cloud computing created multi-billion-dollar success stories but also companies that failed to keep up. AI is likely to follow a similar path, with competition intensifying as capital flows into new areas.

This is precisely the kind of environment where active management is critical. The shift from AI infrastructure to platforms is already well underway. Identifying the right companies at the right time—those with the technology, strategy, and adaptability to sustain long-term growth—will be key to investment success.

AI following a pattern, but at a faster pace

Investing in AI has closely mirrored past technology cycles. In previous waves - such as the mobile and cloud revolutions - semiconductors saw early gains as companies invested in infrastructure. This was followed by growth in platform providers and, ultimately, widespread adoption of applications.

A similar pattern is unfolding today. Since the launch of ChatGPT in 2022, semiconductor stocks have outperformed the S&P 500 by over 30 percentage points. The next phase is well underway, with hyper-scaler capital expenditure exceeding US$200 billion last year and on track to surpass US$300 billion in 2025.

What’s different this time is the speed of progress. The release of lower cost, more efficient AI large language models, such as those from DeepSeek, is likely to accelerate adoption of AI. Rather than the AI industry being dominated by large-scale companies that can afford extensive compute resources, lower compute costs might reduce barriers to entry, fostering increased competition and innovation. This would result in a more diverse group of AI leaders.

Additionally, as costs decrease, we expect an increase in the development of applications and the overall use of AI technology. As seen in previous technology cycles, reduced costs often lead to a transition from an infrastructure focus to application development. This brings the potential for a new subset of AI winners and a wide array of potential use cases.

Conclusion

US equities, particularly large caps, continue to perform strongly, driven by innovation and investment. While the Magnificent Seven stocks have played a key role, we see growing opportunities beyond these market leaders. The AI-driven cycle is continuing, reshaping the competitive landscape and creating new areas of growth.

In this fast-changing environment, active managers are well-positioned to identify the next wave of winners—and losers. Staying selective and monitoring all developments and risks will be crucial to capitalising on opportunities ahead.