As published in The Globe and Mail
Investing is much about interpretation. Markets decide which ideas deserve confidence, which should fade and which assumptions have outlived the evidence.
Individuals and organizations can craft compelling market narratives, but they can't control them forever. Narratives can take on lives of their own and persist after facts change, although not indefinitely. Eventually, numbers force reassessment. The opportunity is to recognize the shift.
In markets driven by news cycles, information travels quickly. Passive flows and algorithmic trading mean a single word such as "miss" can send a stock lower, regardless of business quality. Add "estimates" and consensus hardens.
Narratives shape perception. The data reveal whether it still holds. The disconnect often appears in the lag between fundamentals changing and the market updating the story.
Currently, the dominant market story remains the Magnificent Seven: Tesla Inc. TSLA-Q -1.22%, Meta Platforms Inc. META-Q -0.22%, Nvidia Corp. NVDA-Q -4.99%,
Amazon.com Inc. AMZN-Q -0.31%, Alphabet Inc. GOOGL-Q +2.13%, Microsoft Corp. MSFT-Q +1.94% and Apple Inc. AAPL-Q + 1.17%. The 10 largest companies in the S&P 500 account for roughly 40 per cent of the index. Their story is not over, but it's changing.
Consensus estimates show the Magnificent Seven's earnings growth decelerating to approximately 19 per cent by 2027 from roughly 40 per cent in 2024. That's still healthy, but the gap with the rest of the market is narrowing quickly. The S&P 500, excluding the Magnificent Seven, is projected to grow earnings by about 15 per cent in 2027.
The individual numbers make the shift clearer. Earnings per share growth for the Magnificent Seven peaked in 2024, with Nvidia at 665 per cent, Amazon at 92 per cent and Meta at 62 per cent. By 2027, several growth rates look more ordinary: Alphabet at 4 per cent, Apple at 7 per cent, Meta at 8 per cent and Microsoft at 11 per cent. Even Nvidia is expected to moderate to 82 per cent in 2027 from 130 per cent in 2025.
These businesses remain exceptional, but no longer the same growth engines that justified years of multiple expansion. The Magnificent Seven's price/ earnings premium over the rest of the S&P 500, which spent most of the past decade in the 40 per cent to 100 per cent-plus range, has compressed to roughly 10 per cent to 15 per cent, its lowest level in more than 10 years.
Now, compare that with small-caps. During the 10 years through 2025, the S&P 500's cumulative total return outpaced the Russell 2000's by roughly 120 percentage points. At the start of 2026, the average S&P 500 stock traded at more than 26 times forward earnings compared with roughly 18 for the average Russell 2000 stock. Some of that premium was earned, but the gap had widened beyond what the earnings differential appeared to justify.
That's beginning to change. The Russell 2000 is up by more than 20 per cent through the first half of 2026, its best first-half performance since 1991, outperforming the S&P 500's 9.3 per cent gain by the widest halfway-mark margin since 2003.
Part of the story is fundamental: 2026 earnings growth estimates for Russell 2000 components have jumped to 38 per cent from 23 per cent since January as AI tailwinds finally reach smaller companies. Analysts forecast Russell 2000 earnings growth of roughly 40 per cent in 2027 compared with 16 per cent for the S&P 500.
That's where market memory matters. The market may remember small-caps as structurally weaker, more interest ratesensitive or less reliable than the mega-cap leaders that carried the last cycle. Some of that memory was earned. But inherited stories can outlast the facts that created them. When fundamentals shift, investors risk trading yesterday's narrative instead of recognizing the next one taking shape.
There's evidence for a changing story here. Small- and mid-cap companies are emerging from a multi-year earnings recession with cleaner balance sheets and leaner cost structures.
Although large-caps spent 2025 and 2026 absorbing AI infrastructure capital expenditures, with the top five hyperscalers ( the handful of firms building AI and cloud infrastructure at massive scale, including Microsoft, Amazon, Alphabet, Meta, and Oracle Corp. ORCL-N +4.27%) projected to exceed US$600-billion by 2027, smaller companies may be better positioned for the next stage.
In the picks-and-shovels layer of AI, some companies supply the tools the buildout runs on and, not chasing the hype, are just filling the orders. Others are using AI internally to run leaner, so productivity gains flow straight into margins instead of getting absorbed by overhead. Either way, they don't need an aggressive macro catalyst to outperform. They just need the earnings gap to keep closing.
The question for investors is not simply which story is most compelling. It's whether the story still fits the facts and whether the numbers are already pointing to the next narrative.
Markets can cling to old narratives after the underlying reality has changed. Good investors aren't waiting for the story to break officially; they're paying close attention to the evidence it already has.
Laura Baker is an associate client portfolio manager at Pender Fund Capital Management Ltd. in Vancouver
