After years of mega-cap technology dominance, earnings growth across the market appears to be converging.
Investments in power, grid infrastructure, AI, robotics, and defense are creating potential opportunities across complex supply chains.
Small- and mid-cap companies within the infrastructure and industrial sectors could stand to capture incremental demand as growth diffuses beyond the largest technology platforms.
Over the past several years, equity market performance has been defined by concentration. A narrow cohort of mega-cap, technology-oriented companies has driven a disproportionate share of index returns, powered by superior earnings growth.
These businesses—built on software, cloud computing, digital advertising, e-commerce, and data infrastructure—scaled with extraordinary efficiency. And their asset-light models, global reach, and high incremental margins allowed them to compound capital at exceptionally high rates.
As digital transformation accelerated, economic gains accrued to a relatively small group of companies that controlled core layers of the digital ecosystem. Equity index construction then amplified this effect: as these firms grew, their weight in capitalization-weighted benchmarks increased, reinforcing their influence on overall market performance.
Markets, however, are dynamic. Leadership regimes can persist for long periods, but they do not last indefinitely. Signs have been emerging that growth rates across the market are beginning to converge. So, while mega-cap leaders remain compelling, we believe the relative gap in earnings acceleration between them and the broader market appears to be narrowing.
Year-Over-Year Net-Income Growth: Magnificent 7 vs. Rest of Market
Sources: FactSet, Morgan Stanley Research, and William Blair, as of October 31, 2025. The Magnificent 7 (Mag 7) consists of: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla. E refers to estimated. Estimates represent consensus expectations. Due to a variety of factors, actual events may differ significantly from the estimates or outlooks presented.
From Digital Dominance to Physical Expansion
We believe a key driver of this shift is the evolving nature of growth itself. The previous cycle was dominated by IP-driven expansion, but we believe the next phase of growth may be more physically grounded and capital-intensive, shaped by power generation, transmission networks, manufacturing facilities, robotics, and advanced compute infrastructure.
This distinction matters because physical investment distributes economic benefits differently—activating complex supply chains.
For example, constructing a new data center requires land development, electrical equipment, transformers, cooling systems, construction services, steel, semiconductors, and grid interconnections. In this scenario, each incremental dollar of investment circulates across a broad ecosystem of suppliers, contractors, and service providers.
A key driver of this market shift is the evolving nature of growth itself.
Five Themes Driving the Next Investment Cycle
We believe small- and mid-cap companies—often embedded deep within larger companies’ supply chains—may have the opportunity to capture incremental demand that was less accessible during the platform-dominated era. Below are five thematic currents we believe underpin this evolution.
Theme 1: Power and Energy Infrastructure
The buildout of power and energy infrastructure has become a defining priority as AI adoption accelerates electricity demand. Data centers, particularly those optimized for AI training and inference, require substantial and reliable power. We believe meeting this demand will involve not only utilities and power producers but also equipment manufacturers and engineering firms.
Theme 2: Grid Modernization
Grid modernization and reliability upgrades appear to be becoming structural imperatives as well. As economies electrify and integrate new energy sources, infrastructure that was built decades ago stands to be upgraded to ensure reliability and resilience. This process will likely require sustained investment in advanced transmission systems, smart grid technologies, and distributed energy integration to support long-term system stability and growth.
Theme 3: The Expansion of AI Infrastructure
We believe the universe of AI beneficiaries is broader than it first appeared. The expansion of compute infrastructure depends on an extensive ecosystem, inclusive of semiconductor fabrication, specialty materials, networking equipment, cooling technologies, and construction. Over time, AI-driven productivity gains and large-scale infrastructure investment could cascade across industrial automation, logistics, energy, real estate, and other capital-intensive sectors, broadening the economic impact well beyond the platform companies that deploy these systems.
Theme 4: Robotics and Physical AI
Advances in robotics and automation are also extending the reach of AI into the physical world. What began as a digital transformation is increasingly influencing factories, warehouses, and logistics systems. This convergence of AI-powered software and machinery could expand the range of beneficiaries to include industrial automation companies, precision manufacturers, and engineering specialists, for instance.
Theme 5: National Security
At the same time, national security considerations seem to be reshaping fiscal priorities. Heightened geopolitical tensions have prompted many governments to increase defense spending and expand beyond traditional hardware to include autonomous systems, cyber capabilities, and secure communications. This shift could direct capital toward a broader industrial base, including manufacturers, component suppliers, and specialized technology providers.
We believe the universe of AI beneficiaries is broader than it first appeared.
A Broader Foundation for Market Leadership
Taken together, we believe these developments suggest that market leadership may be poised to broaden as growth opportunities diffuse across sectors and capitalizations.
Small- and mid-cap companies, particularly those tied to infrastructure and capital goods spending, may find themselves supported by durable, multiyear investment cycles.
However, this does not imply the obsolescence of mega-cap leaders, which remain central to innovation. Rather, it points toward a more balanced environment—one in which leadership is less narrowly defined, and growth contributions are more evenly distributed.
Traditionally cyclical industries—long characterized by earnings volatility and sensitivity to economic swings—could begin to assume features of structural growth industries if underpinned by factors such as durable policy support, secular growth trends, and national strategic priorities.
Investment Implications
We believe this evolving backdrop argues for a reassessment of concentration risk and opportunity breadth. Periods of narrow leadership can often reward passive exposure to capitalization-weighted indices, but a market regime characterized by broadening growth may reward a more selective approach that looks beyond the largest companies.
Diversification, in this context, becomes more than a risk management tool. We believe it becomes a way of capturing multiple engines of expansion.
We believe this evolving backdrop argues for a reassessment of concentration risk and opportunity breadth.
Looking ahead, the expected transition to better market breadth will likely not occur in a single quarter, nor do we believe it will unfold in a straight line. As growth drivers become more diffuse, the architecture of stock market returns may shift accordingly.
Small- and Large-Cap Earnings Growth Has Become Less Bifurcated
Sources: FactSet and William Blair, as of February 28, 2026. NTM EPS refers to next 12 months’ earnings per share. Large-cap equities are represented by the S&P 500 Index, a capitalization-weighted index designed to measure the performance of approximately 500 large-cap U.S. publicly traded companies. Small-cap equities are represented by the S&P 600 Index, which is designed to track the small-cap market segment. A direct investment in an unmanaged index is not possible.
For investors willing to look beyond the familiar leaders of the past decade, we believe the next cycle may offer wider, more balanced investment opportunities than markets have provided in recent years.
Arun Sharma is a portfolio manager on William Blair's U.S. growth and core equity team.
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