U.S. small- and mid-cap stocks are stealing the spotlight as investors brace for the midterm elections, with Bank of America strategists warning that the country’s tech heavyweights may have lost their luster.
According to Michael Hartnett and his team, President Donald Trump’s aggressive interventions to lower the cost of living — targeting energy, healthcare, credit, housing, and electricity — are weighing heavily on sectors dominated by energy giants, drugmakers, banks, and big tech. Meanwhile, smaller companies are emerging as the potential winners in what the strategists describe as a pre-midterm “boom.”
A Shift Away from Tech
The tech sell-off is already visible: the Nasdaq 100 suffered its largest three-day drop since April, sliding 4.6%, while the S&P 500 has lagged its equal-weighted counterpart by 4.2 percentage points year-to-date.
Investors are wary of the disruption AI could bring to the biggest tech names. Bank of America notes that AI-driven capital spending by the largest tech firms is expected to consume about $670 billion this year — 96% of cash flow, compared to 40% in 2023. This massive shift from asset-light to asset-heavy models is raising questions about the dominance of the so-called Magnificent Seven tech stocks.
“No longer the best balance sheets, no longer the biggest stock buybacks,” the strategists said, highlighting that these giants may no longer lead market gains.
Small-Cap Winners
In contrast, smaller, asset-sensitive firms stand to benefit from policies that aim to reduce everyday costs for Americans. Investors are increasingly eyeing companies positioned to capitalize on growth improvements as the economy responds to Trump-era interventions.
Hartnett’s early call for international equities since late 2024 also proved prescient, as U.S. markets have underperformed global peers, reinforcing the need for investors to rethink their strategies in a shifting economic landscape.
Bottom Line
As the midterm elections approach, strategists argue that small- and mid-cap stocks are the smart bet, while U.S. tech giants, weighed down by massive AI investments and policy pressures, may struggle to maintain their previous market dominance.
The message is clear: the market leadership of the past decade may be giving way to nimble, smaller players poised to capture the post-election rally.