Tech Titans Stumble As Investors Shift To Small Caps

Late last year, veteran tech investor and analyst Dan Niles made a bold call: his top idea for 2026 was to hold cash. It sounded almost heretical in an era when the so-called "Magnificent 7" tech giants—Apple, Microsoft, Alphabet, Meta, Tesla, Amazon, and Nvidia—had dominated headlines and portfolios. But as the new year has unfolded, Niles’ prediction has proven prescient. According to his analysis, only Meta (+1.7%) and Alphabet (+7.1%) are up so far in 2026, while Apple has notably lagged, sliding 8% year-to-date. The once-unshakeable dominance of these tech titans appears to be fraying, and investors are taking notice.

In 2025, five of the seven Mag7 underperformed the S&P 500, with Alphabet’s eye-popping 65% surge the lone bright spot that kept the group’s average return afloat. Without Alphabet, the collective performance would have trailed the broader market. Niles, now running Niles Investment Management, points to a “distinct shift” that began in late October 2025: the tide is turning from concentration in a handful of large-cap names toward diversification and a renewed interest in small-cap stocks. Evidence? The Russell 2000 index, a bellwether for smaller companies, is up 7.5% already in 2026.

Despite the immediate headwinds facing tech, Niles remains optimistic about the broader market’s prospects for the first half of the year. He cites the tailwinds of the so-called "Big, Beautiful Bill," a tax measure providing advantages in the first quarter, and his expectation that a new Federal Reserve Chair will push for at least 100 basis points in rate cuts during 2026. But even as he maintains a constructive outlook, Niles is quick to warn investors not to ignore the shifting winds beneath the surface.

For the Mag7, the coming weeks are pivotal as several giants report earnings. Niles offers a granular breakdown, highlighting both opportunities and risks. Meta, for instance, remains a beneficiary of robust advertising markets but has shifted its focus to "Meta Compute," a major infrastructure initiative announced in mid-January 2026. The company is targeting tens of gigawatts of power capacity this decade—a move that could dramatically spike capital expenditures and crush cash flow in the near term. Niles draws a parallel to Oracle’s stock slump after its own ambitious infrastructure spending in late 2025, cautioning that the market may not look kindly on such aggressive outlays.

Microsoft continues to ride high on the strength of Azure, its cloud platform, bolstered by a 27% stake in OpenAI. OpenAI’s meteoric growth is hard to ignore; it ended 2025 with a $20 billion revenue run-rate, and projections suggest that could more than double to $44 billion in 2026. Still, Niles flags risks for Microsoft’s March quarter, citing rising memory prices that could squeeze PC margins, as well as intensifying competition from Google Gemini and Anthropic in the AI space.

Tesla, meanwhile, faces a different set of challenges. Demand concerns loom large for 2026, especially after the expiration of the $7,500 federal EV tax credit on September 30, 2025. While Elon Musk’s penchant for bold, forward-looking narratives—think robo-taxis and full self-driving—often buoy the stock in the short term, Niles reminds investors that valuation ultimately matters. Since 2021, Tesla shares are up just 10%, lagging far behind the S&P and Nasdaq’s 47% climb over the same period.

Apple is also at a crossroads. Rising memory costs are expected to force a reset in March quarter earnings guidance. Yet Niles remains bullish for the full year, pointing to the anticipated launch of a foldable iPhone and an AI-integrated Siri as potential catalysts for a multi-year upgrade cycle, reminiscent of the iPhone 6’s transformative impact.

Outside the world of individual stocks, Niles is increasingly focused on credit markets, calling credit the "life blood of the economy." He’s hedging his bets with shorts against both public and private credit providers, citing the 2025 failures of First Brands (auto parts) and Tricolor (subprime auto) as harbingers of a broader credit crunch.

Global macro risks are also coming into sharper focus. In Japan, Prime Minister Sanae Takaichi’s surprise call for a snap election on February 8, 2026, sent shockwaves through the bond market, with 40-year Japanese yields surging 41 basis points in just two days. Niles warns that Takaichi’s "tax cut and spend" agenda could trigger a "Liz Truss-style" market reaction—a reference to the turmoil that rocked UK markets in 2022—prompting him to make a Japan-focused hedge a key part of his strategy.

As investors adjust to this new landscape, asset managers are scrambling to keep up. Roundhill Investment, a U.S. firm known for its Magnificent 7 ETF (MAGS), has been particularly active. With $10 billion in assets under management as of January 26, 2026, Roundhill has launched a string of innovative products, from meme stock ETFs to covered call strategies and now leveraged index funds. On January 23, 2026, the company applied to the U.S. Securities and Exchange Commission (SEC) to list "Roundhill 4X SPY" and "Roundhill 4X QQQQ," offering four times the leverage on the S&P 500 and Nasdaq 100, respectively. This comes on the heels of the SEC rejecting several 3x and 5x leveraged ETF applications from other firms just a month earlier, but Roundhill seems undeterred.

Bloomberg Intelligence ETF researcher Eric Balchunas commented on the trend, saying, "The SEC has already told me not to put these products out, but I don't understand well." The appetite for risk remains strong in some corners, despite regulatory pushback.

Roundhill has also broken new ground with the launch of the first U.S. robotaxi-themed ETF, the "Roundhill Robotaxi, Autonomous Driving & Tech ETF (CABZ)," on January 14, 2026. This fund focuses on companies leading the charge in autonomous vehicles, including Tesla, Alphabet, and Uber. While there have been ETFs targeting the broader autonomous driving sector before, this is the first product zeroing in exclusively on robo-taxis.

The firm’s meme stock ETF (MEME) has also drawn attention. After being delisted in 2023, MEME was relaunched in October 2025, only to see its price drop 20% since its return. Beyond Meat, once the largest holding, has vanished from the portfolio, replaced by SanDisk, which has recently soared to the top spot.

Still, the crown jewel in Roundhill’s offerings remains the Magnificent 7 ETF (MAGS), with $4 billion in assets under management. This fund tracks the major tech names—Nvidia, Alphabet, Apple, Microsoft, Amazon, Meta, and Tesla—and remains a favorite among investors seeking concentrated exposure to the sector’s heavyweights.

As 2026 unfolds, the era of easy bets on tech titans appears to be fading. Investors are being forced to look beyond the familiar giants, weighing new risks and opportunities in a market that’s anything but predictable. The coming months will test whether diversification and innovation can outshine the old playbook of concentration—and whether the next big thing is hiding in plain sight, or waiting just around the corner.