As earnings season winds down, a notable trend has emerged in the markets: several mega-cap stocks have underperformed year-to-date (YTD). In contrast, several mid-to-large cap stocks with strong retail followings have delivered superior returns. This shift in market dynamics is significant, given the influence of mega-cap stocks on major indices and exchange-traded funds (ETFs).
While market breadth has improved in 2024, gains have been more evenly distributed across multiple sectors, a stark contrast to previous years where the technology sector led the market higher.
This year, most sectors have edged up gradually, consolidating within a higher timeframe uptrend and channel. The result has been choppy trading activity, with many of the most notable moves occurring in mid to modest large-cap stocks as opposed to mega-cap stocks seen in previous years.
The Magnificent 7’s Struggles
One of the most striking takeaways from the market's YTD performance is the relative stagnation of the so-called Magnificent Seven stocks. Apple, Microsoft, Amazon, Alphabet, NVIDIA, Tesla, and Meta Platforms. Notably, if Meta is removed from this group, the remaining stocks would be close to flat YTD.
Of these seven, only Meta, Alphabet, and NVIDIA are positive YTD, while the others are in negative territory. Tesla, in particular, has led the downside down by nearly 12% as of Thursday, February 20th's close. This underperformance is significant because, in previous years, these stocks propelled the overall market higher, offering investors strong returns through broad-market ETFs.
However, 2024 has seen a different trend: smaller market capitalization stocks have delivered better risk-adjusted returns, shifting the narrative away from reliance on the Magnificent Seven.
Mid-Cap Stocks Delivering Outperformance
While many mid-to-large cap stocks have outperformed YTD, three standout examples highlight this trend:
Dutch Bros Inc. (NYSE: BROS), a $12.7 billion consumer cyclical company, has surged 56% YTD as of February 20th's close.
The coffee chain had been trending higher since November, and its latest earnings report on February 12 catalyzed a nearly 30% surge. The company reported a 75% jump in Q4 earnings per share to $0.07, while sales increased 35% to $343 million.
Same-store sales grew 4.4%, far exceeding the expected 1.5% gain.
The strong earnings beat and subsequent rally underscore a broader trend: the market is rewarding mid-cap companies for earnings beats with more substantial upside than mega-cap stocks, which have struggled to sustain post-earnings gains.
Doximity Inc. (NASDAQ: DOCS), a $14 billion digital platform company for medical professionals, has already gained 40% YTD.
Like BROS, DOCS shares were in a steady uptrend leading into earnings, then surged nearly 25% following its February 6 report.
The company delivered a massive earnings beat, reporting adjusted earnings per share of $0.45 vs. $0.34 expected and revenue of $168.6 million vs. $152.8 million expected.
Furthermore, its fiscal Q4 revenue guidance of $132.5-$133.5 million surpassed analysts’ estimates of $123.8 million, fueling further investor optimism.
Robinhood Markets Inc. (NASDAQ: HOOD), while larger in market capitalization than the above two with a $49.7 billion market cap, has also been a standout performer, gaining 50% YTD.
The stock had been trending higher since the start of the year, and following its February 12 earnings report, shares surged from $55 to nearly $67 before pulling back.
The company posted an enormous EPS beat, exceeding estimates by 141% and further cementing the trend of mid-to-large cap stocks receiving stronger market reactions to earnings than their mega-cap counterparts.
Capital Rotation in 2025
The strong YTD performances of BROS, DOCS, and HOOD suggest that risk and capital are flowing toward mid-to-large cap stocks rather than the Magnificent Seven. Unlike previous years, when holding leading tech-focused ETFs was enough to generate strong returns, some investors might now see better opportunities in individual stocks.
As earnings season concludes, the market’s response to these stocks indicates a potential shift in investor sentiment. The underperformance of large caps suggests that mega-cap stocks may be nearing exhaustion to the upside, while select mid-to-large cap names continue to deliver compelling upside potential.