The Week That Decides the Rotation

The marathon of 2025 hasn’t followed historical patterns. The seasonal October pullback never showed up this year. Instead, markets kept grinding higher, defying the usual autumn weakness. Maybe that correction already happened back in April’s selloff, or maybe it’s still ahead of us. Either way, like runners in a marathon, they will eventually need to slow to catch their breath, and this week’s earnings will likely determine whether the next major move allows the frontrunners to stay ahead or other 493 to step up to take the lead.

The Magnificent 7 are back in focus, with META, GOOGL, MSFT, AAPL, and AMZN all reporting. Their results will decide whether investors keep crowding into high-multiple tech or begin shifting capital toward lower-P/E and defensive sectors.

The Magnificent 7: Growth Engine Sputtering

For most of 2024, the Mag 7 carried the market. Their earnings power, especially from AI-driven gains, justified the premium valuations, but growth is cooling.

Quarter

YoY Earnings Growth

Q1 2024 +50%

Q2 2024 +28%

Q3–Q4 2024 Expecting +14%

At these multiples, that is a problem. Shrinking growth with sky-high valuations rarely ends well. Investors may soon start questioning whether they are still getting enough return for the risk.

The Real Bubble: Nasdaq’s No-Revenue Rockets

While the Mag 7 at least generates profits, a parallel frenzy has gripped companies with no revenue in the Nasdaq. Call it the speculative froth: stocks trading on hype rather than cash flow. These are the true bubble candidates, and their vertical ascent is divorcing price from fundamentals.

If the Mag 7 falter, risk appetite could shift dramatically from “everything rally” to “risk-off.”

Earnings still back the S&P 500’s rise, which is why I have resisted calling this a true bubble.

But leadership is narrowing, and when markets keep climbing while earnings momentum fades, the foundation weakens.

If the Mag 7 deliver, beating expectations and reaffirming their growth story, the market can continue its current trajectory with AI and mega cap tech leading the charge.

If they miss or guide lower, we could see a significant rotation into lower-multiple names, defensives, and consumer staples.

This quarter and next quarter are supposed to be the weakest quarters of the year.

That is why I believe this week could mark the turning point. My base case is that the Mag 7 report in line, while the broader others surprise to the upside. If that happens, the rotation starts. But if big tech crushes expectations, we keep pushing higher for another leg up with the same companies leading the way.

Cracks Beneath the Surface

Underneath the market’s strength, warning signs are piling up:

• Retail traders have been the only consistent buyers over the past few weeks not institutions.

• Margin debt is back to 2021 levels.

• Call option activity is at extremes not seen since the meme-stock mania.

• High-beta momentum has started to wobble, with the GS U.S. High Beta Momentum Index falling 15% in just six days.

• Historically, when large-cap valuations stretch too far relative to small caps, small caps outperform by 8–10% over the subsequent five years.

Retail has been right since 2020 because “buy the dip” has worked every time. But that only holds if the Mag 7 delivers again. If they do not, dip buyers could suddenly find themselves catching falling knives.

Knowing When to Step Back

At this stage, I don’t think the market is racing toward disaster. What we are seeing feels more like a marathon where the leaders are finally slowing to catch their breath. The Mag 7 have carried the baton for months, setting a relentless pace, but even the strongest runners need to pause before the next leg.

That is why I am not chasing every shiny object or momentum name that takes off after hours. Many of those high-flyers, especially the no-revenue Nasdaq plays, could stumble the moment the narrative changes; meanwhile, the durable, cash-generating companies will keep moving forward steadily, even if headlines turn chaotic.

I would rather hold those kinds of businesses and sleep well at night, knowing I am not at the mercy of a random policy comment or a late-night tweet that shakes the market. The high-quality names may not soar as fast in the short term, but they will also not collapse when volatility returns.

So, while I do not expect the Mag 7 to collapse, I think some of them need to rest, and investors may start rediscovering value elsewhere. Markets are healthiest when leadership broadens, and I believe we are on the verge of that moment.

Next week’s earnings will tell us if this handoff begins, whether the marathon frontrunners finally pass from a few giants to a deeper bench of undervalued, resilient companies that can lead the next phase of the rally.