The Great Rotation… or Just a Detour?

Growth never disappeared. It just tested your patience.

KEY TAKEAWAYS

• Growth stocks underperformed prices, not earnings

• The “great rotation” narrative reflects sentiment, not fundamentals

• AI-driven demand remains capacity constrained

• Tesla, Microsoft, and Meta represent different stages of growth maturity

• Volatility does not invalidate long-term theses

MY HOT TAKES

• Most investors rotated emotionally, not analytically

• Margins matter more than narratives right now

• AI monetization is moving from promise to proof

• Growth cycles mature–they don’t vanish

• Patience is being underpriced

• You can quote me: “if the thesis holds, don’t grow cold!”

Reap what you sow. Have you given up all hope of growth in your portfolio? Come on, you have read the stories about the “great rotation” out of growth into value. You have seen the talking heads on the tube saying things like “value is back baby!” You have heard that Warren Buffet made crazy money buying only value stocks–he simply never overpaid for anything. But, you also made a crazy amount of money on a handful of growth stocks–far more than you ever expected, in fact, so you simply turned your back on value…until it happened. Growth stocks decided to go on extended medical leave and you feel like you were left holding the bag. 

At first you were steadfast. You listened to me and you checked your thesis. You checked and double checked the numbers. Everything looked great except your growth stocks… well, stopped growing in the markets. Notice how I added “the markets,” because they certainly did not stop growing in earnings. That is when the noise about “the great rotation” really started ringing in your brain. You remember using the moniker “mag-7” multiple times a day, every day, but now it was relegated to jokes. You occasionally look at a chart of NVIDIA, and it appears–literally–stuck in the mud. You couldn’t handle it any more, you looked for greener grass in industrials, financials, and possibly some healthcare. Maybe some dabbling in Gold–hey there is a growth play if ever you saw one. But something still bothered you, none of these other sectors had nearly the potential upside that your favorite growth stocks had AND STILL HAVE. Take a look at the following chart and keep reading.

This is one of the regulars in my daily chartbook that I now include from time to time with this blogpost / newsletter. It is quite literally the relative strength of growth stocks to value stocks. When growth outperforms the line goes up and to the right, and vice versa when value dominates. You can see how growth had its foot firmly on the accelerator leading to October of last year but slowly lost ground to value late in the quarter to show a clear near-term declining trend. You can tell this by observing the blue dashed line which shows a linear regression for the last 30 sessions. The line clearly shows a declining, high-level, negative, near-term trend. Got it? That’s a lot, but I think you do. That line represents that gnawing feeling that has caused you to excommunicate the name “mag-7” from your brain. That’s it, you washed your hands of it. It’s only soap, diapers, gold, and JPMorgan for now on. No more game-changing tech. No more double digit earnings growth. Done.

But wait. You take a step back and you realize that Mark simply will not let you forget AI, tech, and communication services! He keeps telling you that the thesis has not changed, and that performance keeps exceeding analysts expectations. He tells you that you have to accept volatility in order to get returns like the fat ones you reaped for so many years. No risk–no reward. It’s not a theory, it’s core finance. He keeps reminding you to stay focused on your long-term goals. Then you look back up at the above chart 🙃 and you notice the pink dashed line which is the longer-term, 90-day linear regression line. You start to wonder if you possibly jumped the gun by piling into an overpriced defense stock or a streaming service / cruise line / theme park operator with a brand that has been around since you were a toddler, whose stock looks sooo on sale. That sneaking fear starts to build as you notice a few early earnings announcements from non-mag-7 tech companies. Micron, Taiwan Semiconductor / TSMC, ASML–they talk about blowout orders with not enough capacity to even satisfy demand. Micron reported 167% earnings growth. 👈 That’s not a typo! You realize that Micron is part of the AI chipsets that NVIDIA sells. They too have been talking about “sold out” conditions. Demand is gangbusters. Management has been doing everything right. Earnings are growing at double and–in some cases–triple digits.

And here we are on the morning of the day when the first of the magnificent-7 stocks announce their Q4 earnings. You remember that the mag-7 posted Q3 earnings growth of 16.8% even with the weirdly-distorted accounting number from Meta and Tesla’s actual -27.7% decline. What did these stocks do in Q4, you wonder. Should you take a close look and determine if it may be time to rethink your attitude toward growth stocks now that you have wrung every last drop out of the quality value stocks out there? Well, after the closing bell, we will hear from Tesla, Microsoft, and Meta. Now, I know that I am jumping all around growth, tech, semiconductors, AI, and some made up moniker (Michael Harnett at BofA), but these are all growth stories.

Now, pay attention, here is your quick cheat sheet on what to look for in the Mags that hit the tape after the bell. Pay attention–we’re just getting started.

When Tesla reports, you should forget the stock chart for a moment and focus on the income statement. Tesla is no longer being judged on vision, vibes, or long-term promises about a robotaxi-filled utopia. Tesla is a car manufacturer! It is being judged on margins, plain and simple. The market already knows deliveries were fine but uninspiring, not to mention that it lost its top EV spot to a Chinese competitor. What the market does not know is whether pricing pressure finally stabilized in Q4 or whether margin erosion continued to chew through profitability. If margins merely stop getting worse, that alone would be a meaningful signal that the market may have already discounted the worst-case scenario. The AI and autonomy narrative still matters, but only after investors gain confidence that the core automotive business has found its footing again. With earnings expected to have declined by -39%, investors will be wondering if it deserves the 216x forward PE valuation. If Tesla can demonstrate operational discipline while continuing to fund its future bets, the growth story does not disappear—it simply matures. This is always a tough one and firmly in the hands of its visionary leader. 😉

When Microsoft reports, the conversation shifts from survival to validation. Microsoft is the institutional litmus test for AI monetization. This is not about flashy demos or aspirational language. This is about whether Azure (its cloud computing division) continues to reaccelerate and whether management can credibly tie AI workloads to real, paying customers. Investors will listen closely to how Microsoft frames demand, capacity constraints, and margins. Capex is high and everyone knows it. The question is whether incremental revenue is coming with incremental margin. Revenues are expected to have grown by 15% and Earnings by 21%. Gross margins were 69% last quarter and are expected to be around 67% in this announcement. If Microsoft can show that AI is not only driving usage but improving the economics of its cloud platform, it reinforces the idea that this entire investment cycle is rational, durable, and still early.

Then there is Meta Platforms, the quiet execution story that keeps getting underestimated. Meta’s earnings are less about whether advertising demand exists and more about whether efficiency gains are sticking. The company already proved it can cut costs without damaging engagement. Now investors want to see whether AI-driven improvements in ad targeting continue to translate into pricing power and margin expansion. Operating margins surged to 42% from 35% in Meta’s last announcement, and analysts are expecting a modest decline to 41% in tonight’s announcement. Any hint that expenses are creeping back unnecessarily will be punished, but steady margins combined with solid revenue growth (analysts expecting 21% revenue growth) would confirm that Meta has turned AI into a profitability lever, not a science project. The market does not need Meta to reinvent itself. It needs Meta to keep doing what it has been doing, calmly and consistently.

Now here is your double top secret bonus 🎆 paragraph. 😉 For Tesla, the tell is automotive gross margin excluding credits, where the market is braced for something in the mid-to-high teens, but anything that shows sequential stabilization or even a modest uptick would be read as a quiet win. For Microsoft, listen for AI to be contributing roughly 6 to 8 percentage points to Azure growth; holding that range or nudging higher would confirm that AI workloads are scaling fast enough to justify the CAPEX. And for Meta Platforms, the key is ad pricing, with expectations for low-to-mid single-digit growth in average price per ad. Anything firmer suggests AI-driven targeting is still improving advertiser ROI. None of these numbers need to be spectacular–they just need to confirm that the engines are still running.

So where does that leave you? Right back where you started, checking your thesis instead of reacting to noise. Growth has not vanished. It has not been disproven. It has simply been volatile. The companies driving earnings growth are still doing exactly that–growing earnings. The market may wander, rotate, or lose patience, but fundamentals have a way of asserting themselves over time. Don’t lose focus. The growth story is very real and very credible, and remember “if the thesis still holds, don’t grow cold.” 

YESTERDAY’S MARKETS

Stocks had a mixed close driven by earnings. Tech shares surged as expectations continue to grow into earnings season. Gold gained and the dollar shriveled once again indicating continued macro indigestion. The Fed will probably announce that it is keeping rates unchanged today, but that doesn’t stop traders from hoping for a dovish press conference.

NEXT UP

• At 2:00 PM Wall Street Time, the Fed’s FOMC will announce its rate decision which is largely expected to remain unchanged. Markets are also likely to expect the Fed to turn up the hawkish heat today based on recent talking engagements by members. At 2:30, Powell will take to the podium in what could be magical or completely flat. Either way, markets are likely to be dancing hard throughout. Pay close attention.

• Important earnings today: AT&T, Corning, ADP, Dana, Elevance, VF Corp, Danaher, Otis Worldwide, GE Vernova, Lennox, Stifel, General Dynamics, Starbucks, Whirlpool, Waste Management, IBM, Tesla, ServiceNow, Lam Research, Annaly Capital Management, Microsoft, Meta, United Rentals, and Southwest Airlines.