As former giant tech leaders lose momentum and AI stocks in particular face new challenges, the spotlight has shifted to traditional defensive sectors and value stocks, according to T. Rowe Price.

But while the shift indicates a shift away from a growth-focused market, the investment landscape is more complex than a simple “growth stocks vs. value stocks” equation.

T. Rowe Price’s Sam Ruiz told InvestorDaily that market momentum is being driven by a handful of mega-cap tech giants, particularly the Magnificent Seven, rather than a broader trend of growth versus value.

Therefore, he noted, it would not be correct to simply assume that "growth has outstripped value." In reality, it all comes down to the Magnificent Seven "beating everything else."

"When they're winning by that much and they're that big in the index, they're all that matters," Ruiz emphasized.

"Given that they are growth stocks, they have led to growth outpacing and would have been a very large percentage of the growth outperformance."

However, he explained that mega-cap tech stocks face difficulties due to stretched valuations and constraints placed on their market capitalization, which could limit future growth potential.

"This makes it much more difficult for their growth rate to be sustained at past levels and they will have to print strong growth," he said.

According to Ruiz, for megatech stocks, huge revenues mean that even an additional $10 billion in revenues becomes less significant in terms of percentage growth the larger they get.

He emphasized that the market is less concerned with how many billions in revenue companies are adding and more focused on the percentage growth achieved.

Also, Ruiz said, while there has been a lot of excitement about how new products can help generate additional profits, there is uncertainty about demand for certain software applications.

"Nvidia generates more profits thanks to GPUs [Graphics Processing Unit] demand, and hyperscalers generate more profits from increased demand for cloud computing. But will the final software/apps really be in high demand?

"It's a big question, and Microsoft is an example of that. We still don't know if Copilot [their software] will attract enough subscription fees to make the investment worthwhile. It also means that valuations can become vulnerable to a lack of return on these investments.”

He noted that this comes against an "unusual backdrop" of a strong economy coupled with interest rate cuts, suggesting that more interest-sensitive and cyclical sectors are likely to perform significantly better.

“Usually you get rate cuts because of a weak economy, so you don't want to take risk/cyclicals. We seem to have interest rate cuts and a strong economy. This is different and very rare. It could be very good for some cyclical companies benefiting from lower rates/costs and higher demand,” he said.

"So if you have better earnings growth outside of those concentrated growth stocks, that usually means the performance starts to be more balanced and broader."

Small caps

Turning to small caps, Ruiz said there are a number of factors, such as lower interest rates and the cost of capital, that could help it outperform, but this market segment also needs to navigate a new landscape.

He also noted that small caps are benefiting from the "Trump trade," which refers to market expectations that suggest it will be easier to do business with former President Donald Trump in power.

"When it comes to U.S. small caps -- there's been a little bit of a Trump trade that's come through the market because if the chances of Trump winning are higher, people expect him to do more on the deregulation mandate," he said.

"And one thing Democrats are known for is making it harder for companies to acquire other companies."

However, Ruiz also said he believes it will be much harder for small companies to compete with larger companies in the future as generative AI becomes mainstream.

"We think in the future the majority of innovation will center around generative AI, and generative AI relies on large balance sheets, strong cash flows, and you need large data sets," he said.

"But a lot of these small companies tend to be much newer companies and they don't have the history or the money or the diversification or the customer base to have these big data sets."

He added that some "fantastic small caps" are in the healthcare and biotech sectors, but moving forward, big biotech companies may increasingly rely on generative AI to develop blockbuster drugs, potentially reducing their reliance on smaller firms.