The so-called Magnificent Seven mega-cap stocks have powered much of the S&P 500's gains. However, their dominant run may be ending, according to JonesTrading Chief Market Strategist Mike O'Rourke.

O'Rourke pointed to recent earnings from Meta (META) and Nvidia (NVDA) that "shattered" expectations yet saw different market reactions. He notes the Magnificent Seven valuations have diverged "drastically," causing investors to "differentiate" between them rather than treat them as a uniform group.

As growth moderates for these mega-cap stocks, O'Rourke expects "rotation" within the Magnificent Seven tech companies as investors compare valuations and future trajectories. He believes this could force funds into other promising areas of the market beyond the narrow mega-cap technology focus, like biotech and pharma.

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Editor's note: This article was written by Angel Smith

Video Transcript

SEANA SMITH: The Magnificent Seven has driven 50% of the S&P 500 gains so far this year. That's according to Yahoo Finance's calculation. Our next guest who's actually one of the first on Wall Street to coin the term Magnificent Seven, well, he's warning that the group's remarkable run is over.

So let's bring him in. Mike O'Rourke, Jones Trading chief market strategist, is here. Mike, it's great to have you. So there's so much excitement surrounding the Magnificent Seven, obviously, still being led by Nvidia. But the group as a whole, why are you warning that maybe the best days are behind it?

MIKE O'ROURKE: Well, I think the key factor here is this earnings season that we've just had. The peak week for earnings season was the beginning of February, February 1. And I think Apple reported that day. I believe Meta reported that day.

And we just had Nvidia kind of wrap up the Mag Seven names last week. And what we saw was the biggest market cap gain in one day was Meta when it reported, and then that was obviously shattered by Nvidia last week when it had $277 billion in market cap.

And I think those prospects for those two names are so drastically different, and their valuations are more attractive, than the rest of the group that I think you're going to see investors differentiate between those leadership names and favor ones over the others and you're not going to have this rising tide where these seven names lift the entire market higher, or the S&P 500 higher for that matter. And I think that that's going to be the difference going forward. It's going to make for tougher returns.

BRAD SMITH: If we did see a wave of profit-taking among the Magnificent Seven and people holding on to that, investors holding on to that, what type of correction do you believe that that would also trigger within some of the broader market?

MIKE O'ROURKE: Well, that's the interesting thing. As that group rallied sharply last year, the other 493 became less expensive. So, it would be nice to see rotation out into the balance of the market. And I'm not sure that-- I'm not sure that the Magnificent Seven are going to create a market-wide correction.

I just think like investors are looking at the market today and they're sitting there saying, OK, Meta had problems a couple of years ago. They seem to have sorted them out. It trades less than 25 times earnings. It's growing quickly.

Nvidia is obviously growing very quickly. Their revenues are supposed to grow 70% this year. And they're making the comparison to an Apple where revenues are supposed to grow 1.5% this year, or Tesla where they're supposed to grow 15%, but we know the EV space is experiencing a lot of challenges.

So, I think you're going to see rotation within the group. And I think you're going to see people venture out to other places in the market. Obviously, one place they've already started looking is the GLP-1 diet drug names like Lilly and Novo, where Lilly is now bigger than Tesla in market cap.

So I think that's what we're looking at here, is more of a churn. Yeah, I think it's going to prevent the market from having widespread gains, but I think people will be looking for different investment opportunities.

SEANA SMITH: Mike, what do you think the upside then looks like for some of those GLP-1 names?

MIKE O'ROURKE: Oh, you know, I'm not a drug analyst, but it's clear that they are disrupting numerous industries, right? They're disrupting, obviously, the packaged foods industry. They're disrupting the medical device industry.

So, they're disrupting the healthcare industry like hospitals and managed care providers if we're going to have healthier individuals or people living a healthier lifestyle. So there is a lot of interesting aspects to that trade. I just don't, you know, I don't look at the stock specifically, but I know that, obviously, they're performing very well.