Investing.com -- The dominance of the "Magnificent 7" tech giants—Apple, Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Nvidia (NASDAQ:NVDA), Meta (NASDAQ:META), and Tesla (NASDAQ:TSLA), has defined the U.S. stock market rally, but some investors are looking beyond these heavyweights for opportunities.
Yardeni Research suggest that the rest of the S&P 500, often dubbed the "S&P 493," offers value as companies outside the Mag-7 implement cost-saving technologies, including AI and automation, to expand profit margins.
Despite concerns about lofty valuations, the Mag-7’s forward price-to-earnings (P/E) ratio of 29.4 remains justified by robust profit margins, analysts argue. However, the S&P 493 is seen as an attractive play, with room for multiple expansion beyond its current 20x forward earnings.
Mid-cap stocks, represented by the S&P 400, are also drawing investor interest. Analysts expect 13.7% earnings growth for mid-caps this year and 16.5% in 2026, a sharp rebound from a 1.5% decline in 2024. The cohort has struggled under higher interest rates and economic uncertainty but is now seeing renewed optimism.
While value stocks, particularly in cyclical sectors such as financials, industrials, consumer discretionary, and select IT firms, present some opportunities. Financials, in particular, have been a standout, with fourth-quarter earnings beating estimates by 12.1%—the sector’s best showing since 2021.
However, Yardeni cautions against blindly chasing cheap stocks, warning that some small-cap companies remain value traps due to weaker cash flows and higher debt burdens.
While some investors are tempted by international markets, with the MSCI World ex-U.S. index trading below 14x forward earnings, Yardeni maintains a "Stay Home" stance, favoring U.S. equities over global diversification.
For investors looking beyond the Mag-7, the key, analysts say, is targeting companies that can leverage cost-saving technology and those poised for a post-Fed-tightening earnings recovery.