We Did the Hype, So What’s Left?
We have made money on optics, memory, robotics, and the thesis is still running. However, the market has priced in a lot of this now and then some.
The thesis has not changed, but we still have to consider a couple things. One, as mentioned, is that the market pricing has caught up, so in the short term there may not be the kind of speed run we saw previously. Second is that the weight of our portfolios and the market have become “heavy” in certain stocks and sectors, leaving others behind. Those left behind stocks have potential as buying opportunities since they are undervalued at the current stock price. We have seen over the past week that the high flyers are getting some profits taken, and it’s the laggards that are starting to catch some bids.
The Diagnosis
The market is running close to record highs, but the money is sitting mostly in a small handful of stocks. Right now the top 10 companies are roughly 40% of the entire S&P 500.
Stocks and sectors lag for a myriad of reasons but two big ones include declining growth potential and money simply being invested elsewhere. Consider buying clothing. You may end up having a lot of one style in your closet because it’s the latest fashion or it fits the weather. It doesn’t mean the winter clothes are worthless, it’s just not popular right now. Eventually the fashion trend dies down, or becomes too expensive, and buyers start to look for the next trend or something cheaper.
Did you know that healthcare was DOWN this year while the broad market was making new highs in May? Then the money finally rotated. In June the sector posted its best five day run against the S&P 500 since 2009, jumped 6.5% in a single week, and $LLY, $JNJ, and $ABBV all pushed to record highs while the broader index went basically nowhere for the month. The laggard caught its bid.
The most surprising story of it all is that the biggest names getting left behind in 2026 are the giants themselves. The Magnificent 7 (the market’s nickname for $AAPL, $MSFT, $GOOGL, $AMZN, $META, $NVDA, and $TSLA) trailed the S&P 500 in the first half, and in June alone the group lost nearly $2.3 trillion in market value. $MSFT fell 22.9% in six months and just logged its worst single month since 2000. Only $GOOGL beat the index. The money did not leave the AI story, but rather it left the OLD way of playing it and chased the hardware suppliers instead. $SNDK gained 858%, $MU 304%, and $INTC 278% in the first half, and all ten of the index’s biggest winners came from the tech sector.
The Players
Tier 1: The Other 490 Companies
The play: equal-weight S&P 500 exposure, such as $RSP.
An equal-weight fund owns the same 500 companies as the regular index but gives each one the SAME slice, about 0.2% each, instead of letting the giants dominate. In a weighted fund like $SPY or $VOO, each stock has a percentage based on its market cap. This means a company like $NVDA has over 7% weighting with its $4.7T market cap in $SPY versus just 0.2% in $RSP.
The nice thing with the equal-weighted index is that you are still participating in all the great companies of America, but the rotation doesn’t drag you down. And any lagging by a heavily weighted company doesn’t drag you down either.
And this is not a prediction anymore. The equal-weight index is ALREADY beating the regular cap-weighted S&P 500 by more than 2 points this year, because the giants that used to pull the index up have spent 2026 dragging it down.
Why should we rotate now? There are 3 reasons at the moment. 1) The bulk of the market is economically healthy with positive earnings, and 62% of S&P 500 stocks are up on the year. 2) Historically a divergence this wide has been a coiled spring and not something inherently broken. 3) The 12 months after midterm elections have averaged gains of 12.4% in one 125 year study and 16.3% in another going back to 1932, and it’s a broad based rally.
The downside is that if the AI trade keeps pumping, the equal weight will lag the regular index. This is a balanced move, not the high risk/high reward move.
Tier 2: The Recovering Ward
The play: the healthcare sector, such as $XLV, with quality single names for those who go deeper.
In June the sector ripped, and suddenly healthcare is the popular trade.
Even after the June surge, healthcare was up just 2.5% at the halfway mark versus 9.5% for the S&P 500, so still a laggard. On the value front, the sector’s forward P/E (today’s price divided by expected earnings over the next 12 months) actually FELL this year, from 18.4 to 17.1, even while prices rose, because earnings estimates are growing faster than the stocks. Compare that 17.1 to 20.3 for the full index. This is the rare value gem case of a sector that got more popular and cheaper at the same time, which only happens when the business results are ahead of the hype.
The pharmaceutical business can be tough as patents expire. Look at Bristol-Myers Squibb $BMY, trading near 8.7 times forward earnings with a 4.6% dividend yield and a dividend that has now been raised 17 years in a row. However its blockbuster blood thinner Eliquis loses patent protection soon (so knockoff generics can be made), so its stock has lagged. These big pharma companies are always on the move for the next big thing, and $BMY is no different with pivotal trial results for two potential new blockbusters, milvexian and Cobenfy, that land in the back half of 2026. A value play with potential growth catalysts is a nice bet.
Pharma does get tied to election season as drug prices becomes a campaign agenda item. One way to keep prices down is to keep them exempt from tariffs, which has been great for the bottom line. There’s little reason to change that now. There’s also the new tax rule that lets companies write off domestic research spending immediately instead of spreading it over years, which should give a direct boost to pharma and biotech bottom lines. Remember that AI advances is also being leveraged in the pharma space, which means it is compressing the cost and time of drug discovery. As the population grows and ages, you still have a growing market in the pharma space, with U.S. health spending projected to grow 5.8% a year through 2033.
Looking at the weak consumer, it’s more likely that they cut spending on travel before canceling prescriptions. This is what makes healthcare defensive, and still a discounted name.
The bearish side of this is that big pharma always has a target on its back so there’s always the policy risk. In addition, the U.S. doesn’t prioritize healthcare with Medicare cuts always on the menu. It is true the sector has rallied the past few weeks, so it’s not an early trade, but something to consider in a balanced portfolio. Size in gradually, earn dividends, and understand this isn’t meant to be a way to carry your portfolio to massive gains. Diversification in the sector is also safer than individual names as drugs become generic or there’s research delays. $XLV is one of the ETFs out there.
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