Cracks are emerging in the stock market dominance of the mega-cap tech group that has led U.S. equities, the "Magnificent 7 (M7; Apple, Alphabet, Amazon, Microsoft, Nvidia, Meta, Tesla)." As the stocks that powered the U.S. market rally no longer overwhelm the market's returns, investor attention is spreading to other components of the Standard & Poor's (S&P) 500. With revenue growth slowing and questions growing over the payoff from artificial intelligence (AI) investments, some say the big-tech-centered strategy is wobbling.
Bloomberg reported on the 11th (local time) that many M7 corporations posted returns below the S&P 500 last year. The Bloomberg M7 Index rose 25% over the year, but that was driven by surges in Alphabet and Nvidia. Many of the others lagged the index's returns. Observers said it is notable that, for the first time since 2022 when the Federal Reserve (Fed) began raising rates, many large tech stocks have fallen behind the market average.
Wall Street expects this trend could continue this year. As corporations' profit growth rate slows, uncertainty is mounting over whether massive AI investments will translate into actual revenue. In fact, so far this year the Magnificent 7 Index is up only 0.5%, and the S&P 500 has gained just 1.8%.
Shifts in investment strategy are also becoming evident. In the past, buying large tech stocks as a basket delivered high returns, but now, analysts say, selective investing that scrutinizes each corporation's results and investment efficiency has become more important. Jack Janasiewicz, chief portfolio strategist at Natixis Investment Managers Solutions, said, "Investing across the entire M7 is no longer a cure-all," adding, "Underperformers can offset revenue."
Slowing revenue growth at big-tech corporations was cited as a reason for their weakening market leadership. According to Bloomberg Intelligence, the M7's expected profit growth rate this year is about 18%, the lowest since 2022. That is not far from the 13% expected growth rate for the remaining 493 corporations in the S&P 500.
Still, some say valuations are not as expensive as before. The M7 Index trades at 29 times expected earnings over the next 12 months, lower than the more than 40 times seen about a decade ago. Over the same period, the S&P 500 stood at 22 times and the Nasdaq 100 at 25 times.
Outlooks diverged by stock. Nvidia continues to post rising sales as demand for AI chips outstrips supply despite concerns about intensifying competition and the durability of customers' expenditure. Microsoft, despite its massive AI investments, is seen as slower to monetize. Apple's cautious approach to AI investment has served as a stabilizing factor, but its high share price has been cited as a burden.
Alphabet has regained market trust by strengthening competitiveness in AI models and in-house chips, but analysts said its upside potential may be limited. Amazon has shown signs of a rebound as expectations for a recovery in Amazon Web Services (AWS) growth are priced in, while Meta continues to face market skepticism over its hefty AI investment expense. Tesla's stock has surged on hopes of a pivot to Autonomous Driving and robots, but its excessive valuation has been flagged as a risk.
Experts said, "It's premature to conclude the tech-led bull market is over, but the market's center of gravity is clearly dispersing," adding, "This year is likely to shift away from an all–big tech bias to a phase that prioritizes results and cash flow."