The ‘Magnificent Seven’ drove the stock market to record highs in recent years. Is the trade over?
The “Magnificent Seven” that propelled the broader market to record heights in recent years has been flipped on its head this year. All but two stocks in the group are in the red to start 2026, with Microsoft down nearly 18% and Tesla and Amazon each shedding more than 8%. Google-parent Alphabet , crowned one of the leading artificial intelligence winners of 2025, is roughly flat while chipmaking darling Nvidia is up just 1% this year. The Roundhill Magnificent Seven ETF (MAGS) is down nearly 6% year to date. The declines come amid a flurry of concerns about these companies’ soaring capital expenditures on artificial intelligence — and their ability to meet increasingly high earnings growth expectations. Rapidly improving AI models and ramping industry competition are also adding volatility. Scrutiny has also increased due to the stocks’ massive run-up, leading to a rotation away from high-growth names and towards cyclical areas of the market that have long been considered undervalued by comparison. “All of these things are kind of creating a little bit of a headache and a headwind for the sector. Are they dead? They might be this year. They might just trade in a range,” Hightower Advisors chief investment strategist Stephanie Link told CNBC. Free cash flow concerns A notable issue for investors has been the strain in tech giants’ free cash flow given their AI-driven capex. “The catalyst for the initial selling was some of them having negative free cash flow, and some of them just having flat year-over-year cash flow, as opposed to both that we have been seeing over the last decade with these companies,” Link said. “And I think you’re seeing a broadening out of the AI trade and that you don’t just have to own the Mag 7. There’s others that will win.” Four of the largest U.S. technology companies by market cap — Alphabet, Amazon, Meta and Microsoft — are expecting to spend nearly $700 billion combined this year. That would be a roughly 60% increase from 2025 levels. Those four major internet companies together generated $200 billion in free cash flow last year, down from $237 billion in 2024. Microsoft is now expecting roughly flat free cash flow for the first time in years, primarily due to intense spending on data centers. Amazon recorded an $11.2 billion drop in free cash flow for its fourth quarter, down from $38.2 billion for the year-ago period. Alphabet boasted strong free cash flow for its fourth quarter, but said it expects 2026 capital expenditures to nearly double its 2025 spend. Link and Melius Research analyst Ben Reitzes both noted that the slide in Big Tech comes as the group’s AI investments have benefited a slew of downstream AI players — such as data center builders, power generating companies and energy infrastructure names. “We wouldn’t be surprised if Broadcom generated more free cash flow than MSFT this year when it’s all said and done. The cash goes right from one place (the hyperscalers) and into another (NVDA, Broadcom and other infrastructure names) … Investors are voting with their feet so far this year since nobody can figure out hyperscaler free cash flow in the 2030s for their mental DCF model,” Reitzes wrote in a Thursday note to clients. Stagnating earnings in question Earnings growth is key for the Mag 7 moving forward to justify their lofty stock prices and valuations. The season has been “so-far mediocre,” Barclays analyst Venu Krishna wrote in a Wednesday note to clients. Big Tech’s earnings per share growth is tracking at 26.6% year over year — which, “in the context of Big Tech’s own history is the slowest growth” since the first quarter of 2023, he said. Only Nvidia is left to report results, which he said could be make-or-break for the group. “Big Tech EPS surprise is tracking at +5.3%, below the LT median of +7.2%, and unlike last quarter, there were no large one-time charges weighing down the group’s overall beat,” Krishna wrote, adding that “EPS deceleration is contributing to multiple compression.” According to Krishna, Big Tech now trades at roughly 25 times forward earnings, returning to valuation levels last seen in the first half of last year. Even though most of the Big Tech companies that have reported have beaten estimates on top and bottom lines, it has not been enough for Wall Street. Microsoft shares experienced a historical sell-off even after the company posted its largest earnings beat ever. Investors came away disappointed by slightly weaker-than-expected growth in Azure and other cloud services, and many remain skeptical about Microsoft Copilot’s growth given the company’s high capex levels. Bryn Talkington, founder and managing partner of Requisite Capital Management, thinks the market is in wait-and-see mode for results driven by tech companies’ AI capex. Alexa and Copilot are laggards compared to peer AI products, she said. “When you actually look at earnings and margins, squarely, all of the earnings and margins still come from tech … The market does not like the capex spend and until there’s a clear line of sight for what these companies are solving for, the Microsoft’s, the Amazon’s will continue to be under pressure,” Talkington said Thursday on CNBC’s ” Halftime Report .” On top of these worries, the market rotation has also pressured tech this year. Cyclical companies that sat out of the bull market rally are now benefiting from strength in the U.S. economy and gross domestic product growth, GDS Wealth Management’s Glen Smith pointed out. “Mag 7 stocks are struggling this year simply because these stocks are exhausted. These are incredible companies and incredible stocks, but at some point, a breather is needed,” said Smith, GDS’ chief investment officer. “So much of the AI-related boost has already been priced in.” Some Wall Street banks are also getting less bullish on tech. In a move to “diversify” its Mag 7 exposure, Citi on Thursday downgraded technology to neutral and moved half of its overweight tech holdings into cyclicals.
