Cathie Wood, the CEO of ARK Invest, has predicted a potential shift in the equity market, favoring small-cap stocks over large-cap tech companies. This forecast is based on the current "restrictive" monetary policy of the Federal Reserve, as outlined in a recent investor letter on Wednesday.

What Happened: Wood highlighted the potential impact of the Fed's current policy, which is aimed at curbing inflation following the COVID-19 crisis. She pointed out that previous instances of market concentration, such as in 1973 and 2000, were followed by significant market downturns.

In contrast, periods of broader market concentration, such as in 1932, 1964, and 2009, signaled the beginning of broader-based equity bull markets.

Wood suggested that the current risk is a result of the Fed's "restrictive" policy, which is in stark contrast to the "easing" policy of 1973 and 2000. She believes that this could create an opportunity for smaller-cap stocks to outperform the mega caps currently dominated by the "Magnificent Six."

Wood wrote, "In our view, having already paid dues with tight money and higher interest rates in this cycle, the next few years could prove fertile for the broad swath of the equity market beyond the Magnificent Six. As inflation and interest rates continue to unwind during the next few years, smaller-cap stocks should have much more compelling upside potential relative to the mega caps now dominated by the Magnificent Six."

Top U.S. tech companies renowned for their advancements in AI have been pivotal in driving stock market growth. These companies include the "Magnificent Seven" — Microsoft Corp. (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), NVIDIA Corp. (NASDAQ:NVDA), Meta Platforms Inc. (NASDAQ:META), Tesla Inc. (NASDAQ:TSLA), Amazon.com Inc. (NASDAQ:AMZN), and Google's parent company Alphabet Inc. (NASDAQ:GOOG), (NASDAQ:GOOGL).

Last week, Wood acknowledged that the company's flagship fund ARK Innovation ETF's (NYSE:ARKK) performance has been impacted by the shift in focus from the "Magnificent Six" to multiomics stocks, which have been adversely affected by the prospect of prolonged high interest rates.

Why It Matters: This prediction by Wood aligns with a recent surge in small-cap stocks. Market strategist Tom Lee noted that small-caps have been on a tear since Federal Reserve Chair Jerome Powell's Congressional testimony, and the rally in the space is only getting started. Lee predicted a 40% jump in the near term for small-caps.

Wood's prediction also comes in the wake of her optimistic outlook for Tesla Inc. (NASDAQ:TSLA), where she suggested that the company's stock could see a significant surge as it moves into the autonomous taxi business, potentially capturing up to 50% of the autonomous taxi market.

Meanwhile, CNBC's "Mad Money" host Jim Cramer advised investors to consider buying the 'Mag 7' stocks when interest rates rise and to buy everything when rates fall, indicating a potential market strategy shift.

This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote