After months of carrying the S&P 500, the rally that has propelled seven mega-cap technology stocks has spread throughout much of the rest of the index on expectations of falling interest rates.

Since the start of the year, the S&P 500 has rallied about 19%, but much of that increase has been due to the relative strength of just seven companies: NVIDIA Corp., Meta Platforms Inc., Tesla Inc., Amazon.com Inc., Microsoft Corp., Apple Inc. and Alphabet Inc. If you remove these seven stocks, dubbed by investors as the "Magnificent Seven," the S&P 500 has rallied just under 7.3%.

Lured by the potential of artificial intelligence, investors have flocked to these large tech stocks, as key Federal Reserve officials have warned that interest rates would remain high as part of the central bank's fight against soaring inflation. But now that inflation has shown signs of moderation, investors now believe the Fed's rate-hiking cycle is over, with rate cuts coming potentially in the first half of 2024.

"Investors have been favoring the size and safety of the 'Magnificent Seven' due to the high interest rate environment," said Michael O'Rourke, chief market strategist at JonesTrading. "As Fed easing begins to appear more likely the balance of the market stands to benefit."

Catching up

From Oct. 27 to Dec. 4, the S&P 500 increased nearly 11%. Without the "Magnificent Seven" stocks, the S&P 500 has increased just below 10.8%, showing gains have begun to trickle throughout the index.

After months of expectations for higher rates, views have shifted, government bond yields have fallen, and the rest of the S&P 500 has begun to rally.

"The change in direction of interest rates is allowing the rest of the market to catch up to the Magnificent Seven," said Todd Walsh, CEO and chief technical analyst of Alpha Cubed Investments. "Returns shouldn't be expected to be as dramatic as the AI ecosystem stocks, and we don't expect the Magnificent Seven stocks to collapse by any means. But the 'Forgotten 493' may well see much better relative performance as this trade unfolds possibly through [the first quarter of 2024]."

Stocks that were hit hardest by higher interest rates, including regional banks, solar stocks, utilities and consumer staples, could see a boost if and when rates move lower, Walsh said.

The "Magnificent Seven" makes up about 30% of the overall S&P 500, so these tech stocks will likely continue to heavily influence the direction of the rest of the market, said O'Rourke with JonesTrading. Still, these seven stocks have all gained a collective 70% on the year and trade at relatively expensive valuations.

"The other 493 have become notably more attractive on a relative basis," O'Rourke said.