As the investment community navigates a complex economic environment characterized by persistent inflation, fluctuating interest rates, and an uneven distribution of market gains, a significant call to action has emerged for investors to broaden their exposure beyond the dominant mega-cap technology stocks. Mike Akins, co-founder of ETF Action, a prominent independent financial technology and research firm, is advocating for a strategic re-evaluation of portfolios, highlighting several overlooked market segments that he believes are poised for a robust performance in the latter half of the year. His analysis, recently shared on CNBC’s "ETF Edge," underscores a potential shift in market leadership, signaling opportunities in software, cloud computing, disruptive technology, and even certain components of the much-discussed "Magnificent Seven."
Software and Cloud Computing: A Foundation for Growth
Akins’ primary recommendation centers on software and cloud computing names, which he notes have seen a significant correction from their previously "nosebleed valuations." Despite this re-pricing, he asserts that these companies possess "very strong growth scenarios" and remain indispensable to modern economic activity. The rationale is straightforward: "These companies prove that ‘yes,’ we still do need software to do our day-to-day jobs," Akins stated. This observation taps into a fundamental truth of the digital age, where software underpins virtually every industry, from enterprise operations to consumer services.
During the peak of the pandemic-fueled technology boom in late 2020 and 2021, many software-as-a-service (SaaS) and cloud infrastructure providers experienced exponential valuation growth, driven by unprecedented demand for remote work solutions, digital transformation initiatives, and e-commerce acceleration. This period saw price-to-earnings (P/E) multiples and enterprise value-to-sales (EV/Sales) ratios soar to historic highs, reflecting intense investor optimism about future growth prospects. However, as interest rates began to rise in 2022 and economic uncertainties mounted, these high-growth, long-duration assets faced significant pressure. Many saw their valuations contract sharply, with some falling 50% or more from their peaks, as the market recalibrated expectations for future profitability in a higher-rate environment.
Despite this correction, the underlying growth drivers for software and cloud computing remain robust. Enterprises continue to invest heavily in digital transformation, cybersecurity solutions, data analytics, and artificial intelligence integration, all of which rely on advanced software and scalable cloud infrastructure. The shift to cloud-native architectures, the proliferation of subscription-based software models, and the ongoing demand for efficient operational tools suggest a sustained revenue trajectory for many companies in this sector. For investors, the current landscape offers an opportunity to acquire shares in companies with proven business models and essential services at more attractive valuations than those seen just a few years prior, potentially setting the stage for a strong rebound as market sentiment normalizes and growth reaccelerates.
Disruptive Technology: Unlocking Mid and Small-Cap Potential
Beyond established software and cloud players, Akins is also flagging disruptive technology as a compelling buy for the next six months. He characterizes this as a "thematic strategy" that extends "a little bit further down market into the mid [and] small-cap range." This particular segment has largely been overshadowed by the colossal performance of mega-cap technology and semiconductor giants, which have dominated market headlines and investor flows over the past year.
The phenomenon of market concentration has been a defining feature of recent periods. For much of 2023 and into the first half of 2024, a select group of large-capitalization technology companies, often colloquially referred to as the "Magnificent Seven" and other AI-related firms, drove the lion’s share of market gains. This narrow leadership meant that a vast swathe of the market, particularly smaller and more nascent companies within the disruptive technology space, saw their stocks languish despite often possessing innovative products, strong intellectual property, and significant long-term growth potential. These companies, operating in areas such as renewable energy technologies, advanced robotics, biotechnology, fintech innovations, and next-generation communication systems, have historically been more sensitive to shifts in economic outlook and investor risk appetite.
Akins suggests that the current environment presents a "pretty rosy set up" for these mid and small-cap disruptive tech names, citing their compelling earnings growth estimates from analysts. The underperformance has created a valuation disconnect, where strong fundamental prospects are not yet fully reflected in their stock prices. As investors seek diversification and growth beyond the crowded mega-cap trade, these smaller, innovative firms could become prime beneficiaries. The potential for "multiple expansion" – where investors are willing to pay a higher valuation multiple for future earnings – is a significant factor here, particularly if economic conditions stabilize or improve, reducing the perceived risk of investing in smaller, growth-oriented companies.
The Magnificent Seven: A Strategic Catch-Up Trade
Perhaps one of the more surprising elements of Akins’ analysis is his identification of opportunities within the "Magnificent Seven" index itself. Comprising tech titans such as Nvidia, Microsoft, Alphabet, Amazon, Meta, Apple, and Tesla, this group has been the primary engine of market returns for an extended period. However, Akins points out an unexpected development: the Magnificent Seven collectively underperformed the broader Nasdaq-100 index in the first half of the year. "Who [would have] thought that Mag 7 was going to be flat year-to-date at the halfway market," Akins remarked, underscoring the surprising nature of this trend.
Indeed, while the Nasdaq-100 index, a benchmark for large-cap growth stocks, gained nearly 20% in the first half of the year, the Magnificent Seven index recorded a slight decline of over 2% during the same period. This divergence highlights a crucial nuance: even within the elite ranks of technology, market dynamics are fluid. The sheer size and influence of these companies mean that their individual performances can significantly impact broader market indices. For instance, while Nvidia continued its meteoric rise driven by AI enthusiasm, other components like Apple and Tesla faced headwinds related to demand concerns, regulatory scrutiny, or increased competition, weighing down the collective performance of the group.
Akins views this underperformance as a "sound catch-up trade" for the year’s second half. Early trading days of the second half appear to validate this perspective, with the Magnificent Seven index up 5% while the Nasdaq-100 was 1% lower as of a recent Friday’s close. This early momentum suggests a potential rotation of capital back into these giants, particularly those that have lagged. Investors might view the temporary dip or sideways movement in some of these highly liquid and fundamentally strong companies as an attractive entry point, betting on their long-term growth trajectories and dominant market positions. The implication is that while their collective performance lagged, individual strengths and potential catalysts could drive a resurgence, contributing to a more diversified leadership within the large-cap tech space.
Small and Mid-Cap Companies: A Broader Market Resurgence
Beyond specific tech sub-sectors, Akins projects a favorable outlook for small and mid-cap companies more broadly, extending his positive sentiment into 2027. He notes that small-caps, in particular, have performed "incredibly well this year," indicating a wider market recovery that goes beyond the narrow focus on mega-caps. This sentiment is strongly supported by recent market data.
The Russell 2000 index, which tracks small-cap stocks, has seen a gain of almost 20% year-to-date, significantly outperforming the broader S&P 500 index, which was up almost 11% over the same period. This robust performance of smaller companies suggests a broadening of market participation, a healthy sign that capital is flowing into a wider array of businesses. "All of the down-market names are really starting to catch up," Akins observed, predicting this trend will continue throughout the year. This catch-up is not solely based on increasing earnings and revenue, but also crucially on an "expansion of multiples that [have been] extremely depressed over the last several years."
Small and mid-cap companies are often more sensitive to domestic economic conditions, interest rate expectations, and investor sentiment regarding risk. Historically, they tend to outperform during periods of economic recovery or when there’s an expectation of declining interest rates, as lower borrowing costs can significantly benefit smaller, growth-oriented firms. For several years, these companies faced headwinds from rising rates, inflation concerns, and a flight to safety in larger, more established companies. The current resurgence implies a renewed confidence in the underlying economic strength and a willingness among investors to take on more risk in pursuit of higher growth potential outside the mega-cap sphere. The expansion of valuation multiples signifies that investors are increasingly recognizing the intrinsic value and growth prospects of these companies, moving past the conservative valuations they were assigned during periods of heightened uncertainty. This shift could usher in a more diversified and sustainable market rally.
Background and Context: Navigating a Dynamic Market
The market’s narrative over the past few years has been largely dominated by a few powerful themes. The artificial intelligence (AI) revolution has been at the forefront, driving unprecedented gains in semiconductor manufacturers and software companies perceived as key enablers of AI. This enthusiasm led to a highly concentrated market, where the performance of a handful of companies dictated the direction of major indices. The Federal Reserve’s aggressive monetary tightening cycle, initiated in 2022 to combat surging inflation, also played a pivotal role, significantly impacting growth stocks and smaller companies that are more reliant on accessible and affordable capital. Higher interest rates typically depress valuations of growth stocks by making future earnings less valuable in present terms.
Against this backdrop, Mike Akins’ insights provide a critical perspective for investors seeking to diversify and capitalize on potential market rotations. Akins, with his extensive background as the head of exchange-traded funds at ALPS before co-launching ETF Action, brings a wealth of experience in understanding market structures and investor behavior. His firm’s focus on financial technology and research positions him well to identify nuanced shifts in market dynamics that might escape a superficial analysis. His call for a strategic shift reflects a growing sentiment among some analysts that the market’s narrow leadership may be unsustainable in the long run, and that a broader participation is both healthy and likely. The implications of such a rotation are profound, suggesting that investors who have been overly concentrated in a few high-flying names might find themselves missing out on significant returns from other segments.
Strategic Considerations for Investors
For investors, Akins’ analysis offers several key takeaways. First, the importance of diversification cannot be overstated. While mega-cap tech has provided impressive returns, relying solely on a few stocks introduces significant concentration risk. Shifting exposure to overlooked sectors like software, cloud computing, and disruptive technology in the mid and small-cap range can help mitigate this risk and potentially capture new growth vectors.
Second, the current environment emphasizes the value of fundamental analysis over pure momentum chasing. Akins’ focus on "strong growth scenarios" and "earnings growth estimates" suggests a return to evaluating companies based on their intrinsic business health and future profitability, rather than just market hype. This approach is particularly relevant for sectors that have corrected from elevated valuations, as it allows investors to identify quality companies trading at reasonable prices.
Finally, the increasing role of Exchange Traded Funds (ETFs) as a vehicle for gaining exposure to these broader themes is implicitly highlighted. Given Akins’ background and his firm’s specialization, ETFs offer a convenient and diversified way for investors to access specific sectors, market capitalizations (small-cap, mid-cap), or thematic strategies (disruptive technology) without having to pick individual stocks. This can be particularly beneficial for navigating less liquid or more specialized market segments.
However, it is also crucial to acknowledge potential risks. An unexpected economic downturn, a resurgence of inflation, or unforeseen geopolitical events could impact market sentiment and corporate earnings, potentially dampening the anticipated performance of these sectors. Furthermore, while valuation multiples may expand, this expansion is not guaranteed and depends on sustained economic growth and investor confidence.
Conclusion
Mike Akins’ perspective from ETF Action signals a compelling shift in investment strategy for the second half of the year, moving beyond the narrow focus that has characterized recent market cycles. By advocating for increased exposure to software, cloud computing, disruptive technology (especially in the mid and small-cap range), and even specific "Magnificent Seven" components poised for a rebound, he outlines a path toward broader market participation and potentially robust returns. His analysis, grounded in fundamental growth prospects and attractive valuations, suggests that the market may be entering a phase where overlooked segments could emerge as the new leaders. This potential rotation, coupled with the strong performance already observed in small-cap indices, paints an optimistic picture for a more diversified and dynamic investment landscape moving forward, challenging investors to look beyond the obvious and uncover value in previously underappreciated areas.
