Fall Should Be Colorful. The Stock Market Outlook Calls for Bargain Buys and More Gains.

Fall will be a time for investors to ignore the Magnificent Seven tech stocks and look for deals in the less expensive parts of the market. (Illustration by Grace Russell)

Healthcare, financials, industrials, and small-caps are on many shopping lists. But not the Magnificent Seven.

If you blinked earlier this year, you missed a great opportunity to buy stocks. The S&P 500 tumbled 19% between mid-February and early April due to fears about changing trade policy and President Donald Trump’s “Liberation Day” tariff announcement. But the blue-chip index, along with the Dow Jones Industrials and Nasdaq Composite, have come roaring back to near-record highs. The S&P 500 is now up 10% year to date, led by gains in the megacap technology stocks Nvidia, Microsoft, Meta Platforms, Broadcom, and Palantir Technologies.

So, where to from here?

Trading is likely to be choppy between now and the end of the year, with the S&P 500 finishing only modestly above current levels. But investors may be able to reap more profit from a shift in market leadership and a broadening of the rally.

The Magnificent Seven trade, which favored Alphabet, Amazon.com, Apple, Microsoft, Meta, Nvidia, and Tesla, looks to be waning in popularity after driving the major indexes higher for the past two years. Investors should focus instead on interest-rate-sensitive sectors such as financials and industrials, beaten-down value stocks in the healthcare sector, and small-caps. Not only are most of these stocks cheaper than Big Tech and other market leaders, but they should benefit from a likely reduction in interest rates plus stimulus from the White House and Congress.

In many respects, the challenges that the market faced at the beginning of the year remain the same today. Valuations are stretched, with the S&P 500 trading at 24 times this year’s estimated earnings, above its 10-year average price-to-earnings ratio of 20. And outsize profit growth is concentrated in just a handful of names.

Earnings for the Magnificent Seven are expected to increase 24% this year, compared with just under 7% annual growth for the equal-weight S&P 500. The artificial-intelligence darlings have led the market higher due to supersize growth prospects but now sport supersize valuations of more than 30 times forecast earnings.

“I don’t think companies like Nvidia and Microsoft are necessarily priced to perfection, but there is less room for error,” says L. Joshua Wein, vice president and portfolio manager at Hennessy Funds. “If not for the hope of rate cuts, it’s tougher to justify those valuations.”

Mark Luschini, chief investment strategist at Janney Management, believes the S&P 500 could hit 6600 in the near term, up just 2% from current levels. “There is still room for the market to continue to advance,” he says. “But techs can’t continue to go up at the pace they have. As a consequence, brace for pullbacks.”

Meanwhile, the earnings outlook is rapidly brightening for small-caps and the rest of the S&P 500, which could see double-digit profit growth in 2026. The White House has begun to focus on more fiscal stimulus, such as the tax cuts in the One Big Beautiful Bill, while Fed Chair Jerome Powell strongly hinted at the central bank’s Jackson Hole symposium in August that Fed officials will cut interest rates later this year, and perhaps as soon as September.

“We’re almost getting a recessionary-type response from the government at a time when the economy has just slipped,” says Jim Caron, chief investment officer of the portfolio solutions group at Morgan Stanley Investment Management. “That’s a pretty bullish cocktail for markets.”

Shannon Saccocia, chief investment officer of wealth at Neuberger Berman, advises investors to “lean into” a rotation of less-favored parts of the market. “We are now getting a rally due to less-punitive tariffs,” she says. “There is a more supportive tax environment, deregulation, and lower interest rates, too. That should mean continued momentum for a broadening-out trade.”

What it won’t mean is robust economic growth. The Conference Board is forecasting 1.3% growth in U.S. gross domestic product in 2026, below the Fed’s most recent outlook for 1.6% growth, published in June. At the same time, inflation is likely to remain elevated, partly due to tariffs. Higher prices could put a dent in consumer spending and corporate profits.

The market doesn’t look expensive beyond the Mag Seven, however. The Invesco S&P 500 Equal Weight ETF trades for less than 19 times estimated earnings, a larger-than-usual discount to the capitalization-weighted S&P 500. Saccocia expects the indexes to grind higher from here, but favors economically sensitive sectors such as financials and industrials.

Small-cap financials and industrials, in particular, could benefit from the combination of fiscal and monetary stimulus, which could spur growth across the U.S. economy.

“AI has been holding up the economy while housing, construction, transportation, and trucking have been at almost recession levels,” says Mike Rode, senior investment director of American Century Investments. “The Trump administration is trying to pull every lever to get the rest of the economy growing.”

Rode likes regional banks UMB Financial and Home BancShares, which both trade for less than 13 times this year’s estimated earnings, and industrial stocks such as construction equipment rental company Herc Holdings, industrial waste-management firm Clean Harbors, and trucker Knight-Swift Transportation Holdings.

Healthcare is another sector with compelling values; the iShares U.S. Healthcare exchange-traded fund is just about flat year to date, and has a P/E ratio of 16.5 based on the next 12 months’ estimated earnings. Sam Rahman, a portfolio manager at Hedgeye Asset Management, says medical-equipment company Thermo Fisher Scientific, which makes microscopes, spectrometers, and other analytical instruments, is a good value at about 22 times earnings estimates. “Healthcare has been beaten up, but there are pockets that can improve,” he says. “The sector may be at a point where the negative news is priced in.”

Julien Albertini, manager of the First Eagle Global fund, also likes medtech stocks. He owns Becton Dickinson, a maker of syringes, needles, catheters, and infusion pumps. The stock trades for less than 14 times earnings estimates. “This is a simple and predictable and defensive business that generates lots of cash flow,” Albertini says.

Don’t bet against the consumer either, says Hennessy’s Wein. He thinks regional grocery-store owner Weis Markets and real estate brokerage firm Compass look attractive and could benefit from more demand if the Fed cuts rates in September, as expected, and continues to lower them several more times this year and into 2026. Weis, which isn’t covered by any Wall Street analyst, trades for 18 times the past 12 months’ earnings, and for 27 times 2025 estimates for non-GAAP earnings, or those that don’t conform to generally accepted accounting principles.

Charles Lemonides, chief investment officer of hedge fund ValueWorks, likes grocery-delivery service Instacart, which he says has been unfairly punished due to concerns about competition from Walmart and Amazon. The stock trades for 23 times earnings estimates, near its low point since it went public in September 2023. “Instacart is a tremendous business at a valuation that’s a fraction of its peak,” Lemonides says.

Non-U.S. stocks offer another intriguing alternative to the AI trade, and the rallies unfolding in some international markets may have only just begun. The iShares MSCI EAFE ETF, which tracks developed markets in Europe, Australia, Asia, and the Far East, is outperforming U.S. stocks with a 21.5% gain year to date. Yet, it trades for only 16 times earnings estimates for 2025.

First Eagle’s Albertini owns South Korean tech giant Samsung Electronics, which he thinks should benefit from booming demand from semiconductors. The stock trades for just 16 times estimated earnings, a huge discount to Nvidia’s forward P/E of 40.

Scott Klimo, chief investment officer of Saturna Capital, says two of his firm’s holdings—Italian electrical-cable manufacturer Prysmian and Japanese wiring company Fujikura —both provide exposure to the AI data-center buildout trend at much more reasonable valuations than many U.S. infrastructure companies. Prysmian trades at a forward P/E of 20, while Fujikura is valued at around 28 times this year’s earnings forecasts.

The bond market has been much less volatile than the stock market this year, and prices have inched higher despite the tumult impacting stocks. The benchmark iShares Core U.S. Aggregate Bond ETF is up about 2.5%, reversing last year’s nearly 3% loss.

The 10-Year U.S. Treasury yield briefly dipped below 4% in early April after President Donald Trump unveiled his Liberation Day tariffs. But the yield has been range-bound for much of 2025, between about 4.2% and 4.7%.

The 10-year Treasury yield could tick even higher, regardless of the Fed’s rate moves, because of continued concerns about inflation. But Mona Mahajan, head of investment strategy at Edward Jones, doesn’t expect yields to snap out of this year’s zone soon. “Anything over 4% is still attractive,” she says. “There is value in the seven- to 10-year part of the market. You can lock in yields for longer, and now there is an increased chance of price appreciation if the Fed starts cutting rates.” (Bond prices move inversely to yields.)

Janney’s Luschini also likes Treasuries, but thinks investors should look for a slightly shorter duration. He considers intermediate Treasuries—around three to seven years—fairly valued, especially if inflation pressures grow. “Short of a recession, the 10-year yield may not fall as much,” he says.

Investors looking to own intermediate- and longer-term Treasuries can get exposure through funds such as the iShares 3-7 Year Treasury Bond and iShares 7-10 Year Treasury Bond ETFs.

George Young, a portfolio manager with Villere & Co., sees value in corporate bonds. His firm, which runs a balanced fund investing in equities and fixed income, has bought five-year bonds of drugmaker Eli Lilly, and shorter-term bonds from Scotts Miracle-Gro and adhesives maker H.B. Fuller.

Equities aren’t the only winners so far this year. Commodities such as gold and silver have been stellar performers, and cryptocurrencies such as Bitcoin and Ethereum, while volatile, also have soared. Buying a Magnificent Seven–fueled index fund alone doesn’t make as much sense as it once did. Buying everything else makes more.

Write to Paul R. La Monica at paul.lamonica@barrons.com