by Ibrahim Kanan, Managing Director and Head of U.S. Core Equity, BlackRock Fundamental Equities
The Magnificent 7 stocks have been leading the market for the better part of three years, but time and the evolution of the AI investment cycle are revealing degrees of “magnificence” as fortunes diverge. Active equity investor Ibrahim Kanan is eyeing the race as the baton is passed to the next leg of prospective market leaders.
The U.S. stock market has been driven by narrow forces over the past three calendar years as the collective energy around artificial intelligence (AI) supercharged early leaders in the “Magnificent 7” ― the mega-cap stocks in the S&P 500 highly leveraged to the AI buildout.
Ibrahim Kanan, Head of the U.S. Core Equity team within BlackRock Fundamental Equities, sees change afoot. After a multi-year period of historic concentration in the widely tracked S&P 500 Index, a long-anticipated broadening is finally starting to take shape ― and, in the process, seeding a robust field for active stock selection.
Analyst estimates point to a narrowing earnings growth gap between the Mag 7 and the rest of the market in 2026, as shown in the chart below. As a portfolio manager and active stock picker, Mr. Kanan sees this presenting opportunity to enter or add to positions in fundamentally sound (and some forgotten) companies at undemanding valuations.
He offers three reflections as this market broadening unfolds, informed by his strategic focus on targeting above-market returns:
Broaden your lens, but narrow your picks
The 10 largest stocks by market cap still represent close to 40% of the S&P 500 Index today. This compares to 19% at the end of 2010.1 In Mr. Kanan’s assessment, this means many large U.S. companies that are “great, quality businesses” have been overlooked ― and that many investors are left underexposed to them by virtue of tracking the index.
He cites Intel as an example. The U.S. semiconductor company is in the midst of writing a new chapter. At less than 0.4% of total S&P market cap as of mid-February,2 index-hugging investors may be undershooting its potential upside.
Some investors have looked to other indexes for “diversification” away from the S&P 500’s top-heavy bias. Among them: the equal-weighted S&P 500 and the small-cap Russell 2000. Mr. Kanan cautions that leaning into the former means neutralizing AI outperformance, while pivoting to the latter comes with a quality sacrifice, as many small public companies today are unprofitable. He further notes that the equal-weighted S&P 500, which apportions each of the 500 constituents at equal measure, has underperformed its market-cap-weighted counterpart amid the recent broadening.
Pro tip: Widen your lens beyond 2025’s top 10 and sharpen your pen to home in on the next leg of potential leaders. Mr. Kanan is targeting a small group of names with prospects of delivering more return than the broader U.S. indexes. One area of interest: industrials, particularly those that are facilitating and feeding into the AI data center buildout.
Choose companies first, not factors or sectors
Dispersion is evident across the market, including among the Mag 7. And Mr. Kanan expects to see greater differentiation between AI “winners” and “losers” over the next 18-24 months.
As Carrie King, Global CIO of BlackRock Fundamental Equities, notes in a recent episode of The Bid podcast The first-round leaders in the AI super cycle are unlikely to repeat the exponential revenue growth, margin expansion and share price appreciation that they’ve enjoyed since 2023. Yet the AI theme is well-poised to remain a market-driving force.
Mr. Kanan is looking in new places to capitalize on AI progress and sees opportunities emerging across sectors as use cases for the technology begin to materialize.
Pro tip: AI is still a force not to be ignored. Choose your mega-caps wisely and sniff out other high-potential candidates, not on factor or sector preferences but on their individual ability to grow earnings beyond consensus expectations. Mr. Kanan is looking for companies among the “other 493” that are essentially emerging from a 2023-2024 earnings recession.
Diversifying in AI
Many investors believe firmly in AI as an investment opportunity but may be worried about crowded positioning or the untold return on big capex spending ― or they may simply be seeking unique expressions of the theme.
Mr. Kanan sees a growing number of companies across industries using AI to gain a competitive advantage. He and his team run a quantitative screen to identify such companies. They then apply fundamental analysis to see if it’s bearing out in their financials ― i.e., having measurable impact on company margins and revenues. Their evaluation finds the list of companies is small but growing, making it a potentially good time to pick up on a budding trend. See chart below.
Each of the above are not just ideas but active strategies put into practice as Mr. Kanan and his team seek to advance their record of alpha generation in 2026, navigating what they see as a broader market ripe for stock picking
Ibrahim Kanan
Managing Director and Head of U.S. Core Equity, BlackRock Fundamental EquitiesCopyright © BlackRock
