Have the Magnificent 7 lost their magic?

Seven mighty tech companies have dominated stock exchanges for years. Now, they seem to have lost their magic. The Magnificent 7 already dropped by 15% this year. Has the time come to stop seeing Big Tech as a sure thing?

For over a decade, investors did well to ignore any ideas about diversification. Simply investing everything in US equities was (in hindsight) the smartest move. Particularly in a specific group of tech companies. Initially, these companies were known as GAFA, for Google, Apple, Facebook and Amazon. This grouping was eventually expanded and renamed the Magnificent 7 to include Microsoft, Nvidia and Tesla as well. For years, these shares drove the US stock market. Between the beginning of 2023 and the end of 2024 alone, the Mag 7 rose by over 160%. Yes, that’s right: one hundred and sixty percent.

It appears that 2025 may be a turning point. US equities have been lagging behind. The S&P 500 has been down by 5% since the beginning of January, and the Nasdaq is doing even worse at 10% down. The Mag 7’s poor performance is especially striking. They have already dropped by 15% this year, with Tesla as the greatest outlier at -40%. Only Meta made a profit at all, at +3% (situation on 12 March). When the Nasdaq fell by 4% on 10 March, some USD 1,000 billion in equity evaporated. USD 750 billion of that drop was due to the Mag 7.

The tech sector is doing significantly worse than the market as a whole, lagging by the most since 2016 according to Morgan Stanley. Meanwhile, hedge funds have reduced positions in these shares for the first time in a year. According to Morgan Stanley, in January insiders such as CEOs and CFOs were selling shares at the fastest rates since 2021. ‘Regular investors’ appear cautious as well.

Why are the Magnificent 7 failing?

1. Reignited fear of recession

Last year, US economic policy focused on reducing inflation without causing a decline, hoping for a so-called soft landing. Washington’s new team now seems to be launching a market correction that, as they themselves acknowledge, could upset the economy and result in a much harder landing.

President Trump and his advisers have argued that a detox may be necessary, leading to short-term inflation. In an interview, Trump avoided addressing the possibility of a recession. “There is a transition period, because what we are doing is very big”, he said. A few days later, however, he explicitly stated hedoes not expect a recession. Either way, the mixed signals from Washington – from import tariffs to an on-again, off-again relationship with Ukraine – seem to have reignited investors’ fears. That is pulling down the entire market, and the first to be affected are companies with especially meteoric climbs.

2. Extreme valuations and slower earnings

After years of climbing prices, the Magnificent 7 have become very expensive. Many of these shares are trading at price/earnings ratios for the next 12 months that are close to 30 or even higher. This is much higher than the market average, which is around 22.

While the Magnificent 7’s combined earnings rose by 36.8% last year, the earnings growth for the rest of the S&P 500 was only 4%. Analysts predict that the Magnificent 7’s earnings growth will drop back down to around 15% this year, while other earnings might grow by as much as 9%. In other words, they expect the gap between Big Tech and everyone else to shrink. This makes investors hesitant to pay so much for Big Tech.

3. Profit-taking after years of outperformance

‘What goes up, must come down’ may not apply literally, but the period after a blazing rally is often more subdued. After the Magnificent 7’s years of extraordinary outperformance, profit-taking is only natural. Investors with good returns go for a sure thing and cash in some of their shares.

4. Regulatory pressure and political climate

Big tech companies are under close scrutiny by regulators around the world. Competition issues, privacy laws and proposals to break up the most powerful players all lead to uncertainty. And then there’s the changing political climate: a new wind is blowing in America, bringing with it the risk of trade conflicts and additional uncertainties. The Magnificent 7 generate around half their sales outside of the US. Although they appear to be less affected by retaliatory import tariffs and export restrictions for now (with the exception of Nvidia), not everyone appreciates the tech billionaires’ open support of Donald Trump.

5. AI investments still to prove value

By now, everyone agrees AI is more than a hype. The problem is the hundreds of billions invested in data centres and infrastructure by various big tech companies eager to ensure they don’t miss out. AI’s rapid adaptation and the bombshells dropped by DeepSeek in January and Manus in March are now raising doubts as to whether all those billions will actually pay off.

Is there a rotation underway?

Investors have been shifting away from Big Tech to other areas in recent months.

As Big Tech sputters, according to Morningstar, the first few months of 2025 showed strong outperformance by sectors such as healthcare, basic materials and financials. In the US, banks, insurance companies, oil and gas and industrial conglomerates have proved the main driversof the equity market. This is a break from previous years, when technology was the biggest driver.

International markets and emerging regions have also been doing well for themselves in recent months. Now that American exceptionalism is weakening, investors are looking elsewhere for opportunities. The STOXX 600 Europe has already risen by 6% this year, while the continental Shanghai Composite gained 3.5% and Hong Kong’s Hang Seng Index gained 20% (situation on 12 March). Two especially bright stars on the European firmament are defence and banking. The British stock market is booming as well, with heavyweights in energy, mining and financials.

China is staging a tech rally of its own. For years, Chinese tech companies have lagged behind thanks to the country’s own strict regulations and trade conflict with the US. Now Beijing has eased up and Chinese companies have embraced AI. After two lean years, the Chinese tech sector is working on a comeback, driven in part by low valuations and hopes of growth recovery. Meanwhile, Citi has downgraded US equities and upgraded Chinese equities.

Finally, there is the psychological factor. Markets tend to go up and down. Overexcitement gets reined in and undervalued areas receive renewed interest. With the Magnificent 7 so dominant, some investors worry. How sustainable can it be for everyone to invest in the same seven equities? With other equities showing they can also do well without the Seven’s help, the market’s concentration risk becomes significantly lower. Some strategists even see this development as one necessary for the bull market to be able to continue long-term. After all, a broader rally is fundamentally healthier than a restricted one.

Time to write off the Seven? Not yet

Is this a lasting rotation or a brief interlude? Opinions are divided. Sceptics point out that although Big Tech has struggled before, it also came roaring back. Experience has taught us never to be too quick to write off Apple, Amazon or Microsoft and their enormous amounts of innovation and market power. Besides, should the economy weaken after all or central banks cut interest rates faster than expected, growth shares may well become beloved once again.

Others think the current situation is different. If earnings growth has a broader base and tech loses its monopoly on outperformance, why should investors return to old habits? Many sectors are also not that expensive yet, leaving ample room for longer-lasting outperformance.

The truth probably lies somewhere in the middle. Big Tech will not disappear altogether, but become less all-powerful. Simply buying Mag 7 shares no longer means success is assured. Even giants can make mistakes or lose market share to new challengers. A diversified portfolio can absorb such setbacks, but if you have only invested in a single sector, the impact will be greater.

Time to review your US shares?

The message to investors is clear: diversification never truly disappeared, and now it’s back. What could some good ways be to diversify US shares in the current climate? You could, for example, opt for an equal weight strategy on the S&P 500, giving each company the same weighting and avoiding overconcentration on a few big names in tech. Going for low-volatility US equities could be another interesting way to diversify and dampen your portfolio’s response to fluctuations. You can apply this strategy by investing in specific ETFs. Simply search for the terms ‘equal weight’ and ‘low vol(atility)’ on our platform.

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