A team of strategists led by Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America (BofA), recently stated that the bank's proprietary "U.S. Regime Indicator" recorded its largest monthly jump in over a year in July. This suggests the indicator may be signaling a significant potential shift in the U.S. business cycle from "downturn" to "recovery."

According to BofA's strategy team, during past business cycle recoveries, the price-to-earnings (P/E) expansion of the so-called "not-so-Nifty 450" (the remaining 450 stocks in the S&P 500 excluding the top 50 mega-caps) has been roughly double that of the "Nifty 50" (the top 50 stocks by market cap).

BofA's custom index definitions:

• "Nifty 50": The top 50 stocks in the S&P 500 by market cap (BofA's custom grouping), rebalanced monthly, available in both market-cap-weighted and equal-weighted versions.

• "Not-so-Nifty 450": The remaining 450 stocks in the S&P 500 (those ranked below the top 50 by market cap), also rebalanced monthly with market-cap and equal-weighted versions.

Will the "Not-So-Nifty 450" Fully Outperform the "Nifty 50"?

The significant momentum shift captured by BofA's proprietary "U.S. Regime Indicator" has drawn global attention. Subramanian's team noted that "continued improvement in August would serve as early confirmation of a shift from downturn to recovery."

Moreover, BofA strategists emphasized that after two consecutive months in the new regime, the shift would become more "official." Historical data shows that during past U.S. recoveries, the "Nifty 50" underperformed the "not-so-Nifty 450" by an average of 3.3 percentage points annually, with only 36% of recovery periods seeing the Nifty 50 outperform.

BofA's historical analysis also reveals that during recoveries, the P/E expansion of the "not-so-Nifty 450" index was twice that of the "Nifty 50." The strategists added that under the "recovery" framework of the "U.S. Regime Indicator," capital tends to flow out of the overcrowded "Magnificent Seven" tech giants, driving much stronger valuation rebounds and relative performance in the "other 450" S&P 500 stocks.

BofA's market-cap analysis shows that since March 2015, the market-cap-weighted S&P 500 (SP500) has significantly outperformed its equal-weighted counterpart (RSP), with gains of 161% vs. 81%. Meanwhile, the "Nifty 50" outperformed the smallest 50 stocks in the S&P 500 by 403% on an equal-weighted basis.

Despite the unprecedented AI boom—which has propelled mega-caps like Nvidia, Microsoft, and Google (all high-weight S&P 500 components benefiting from AI)—the performance gap between large-cap and small-cap benchmarks has reached its widest in over 30 years, suggesting large-cap dominance may persist.

The "Magnificent Seven" tech giants (Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms), which account for ~35% of the S&P 500 and Nasdaq 100, have been the primary drivers of the market's record highs.

Long-term data spanning 30 years shows small-cap tech indicators lagging large-cap tech performance by the widest margin ever. Year-to-date, Microsoft and Nvidia have surged 24% and 36%, respectively, with both surpassing $4 trillion in market cap (Nvidia leading globally, followed by Microsoft). This has driven the large-cap tech index up 16% in 2025, while the small-cap tech index has fallen 1%.

Since 2023, the "Magnificent Seven" have been the strongest engine of the U.S. stock market, attracting global capital with their AI-driven revenue growth, rock-solid fundamentals, robust free cash flow, and expanding buybacks. However, their historically high valuations (six of the seven trade above the S&P 500's 25x forward P/E) have made Wall Street increasingly cautious.

Yet, based on historical data and market logic, BofA strategists believe this trend may be nearing its end. Subramanian's team stated: "If the Fed's next move is a cut and our Regime Indicator shifts to 'recovery,' we think the mega-cap rally could be closer to its end. This potential regime shift has major implications for investors overweight large-cap tech (IYW)."

When the Fed's Rate-Cut Cycle Begins, Will the "Not-So-Nifty 450" and Small/Mid-Caps Shine?

BofA's "Regime Indicator" showed broad-based improvement in July, with 6 of its 8 inputs turning positive. Strengthening factors included EPS revision ratios, inflation, GDP forecasts, 10-year Treasury yields (US10Y), capacity utilization, and high-yield bond spreads. However, leading economic indicators and ISM PMIs weakened.

Since February 2022, the indicator has fluctuated between business cycle phases due to volatile macro signals. BofA attributes recent swings to "whiplash effects from inventory and demand shifts—first from COVID disruptions, and more recently from market anticipation of Trump-era tariffs."

Despite historical inconsistencies, the current strong reversal in multiple inputs suggests this recovery signal is more durable than past "false starts," though strategists remain cautious about declaring a definitive trend.

BofA strategists noted that as investors grow wary of the "Magnificent Seven's" record valuations, combined with recent economic data pointing to a "soft landing" and rate futures traders pricing in two Fed cuts starting September, small/mid-caps (especially micro-caps) now face a structural opportunity. However, focus should be on high-quality and low-risk factors to hedge downside risks, avoiding highly leveraged consumer stocks and unprofitable tech names in the small/mid-cap space.

If the Fed begins cutting rates and the U.S. achieves a "soft landing," the market rally could rotate toward the "not-so-Nifty 450" and small/mid-caps—which have lagged the "Magnificent Seven" since 2022. These stocks are theoretically highly sensitive to Fed rate expectations, and even modest cuts could boost their battered prices and valuations, especially for high-quality small/mid-caps with solid fundamentals. Lower rates would also ease long-standing debt pressures, potentially improving margins and valuations.