The so-called "Magnificent Seven" group of US tech giants has been treading water this year, emerging as a major obstacle for Wall Street in achieving its year-end targets.
In the first half of the year, a broad index tracking these seven stocks has been volatile and ended flat compared to its starting point, while the S&P 500 index gained 9.3% over the same period. This nearly 10-percentage-point gap marks the group's second-worst annual start relative to the broader market on record.
This underperformance by the cohort, which accounts for roughly one-third of the S&P 500's weight, is putting pressure on Wall Street strategists' annual forecasts, even as the artificial intelligence frenzy continues to propel significant gains for semiconductor and other technology stocks.
The average year-end target for the S&P 500 among major institutional strategists is 7,824.09 points, implying roughly 5% upside from Wednesday's close. According to calculations, if the Magnificent Seven continue to lag, the index's other 493 constituents would need to rally an additional 6.8% on top of their year-to-date gain of approximately 13% for that target to be met.
Semiconductors Steal the Spotlight, Leaving Giants on the Sidelines
The Magnificent Seven, which have dominated markets for nearly a decade, have lost their luster this year. Capital has instead flowed toward the direct beneficiaries of AI infrastructure—chip stocks, with the Philadelphia Semiconductor Index surging 83% year-to-date.
The collective performance of the tech giants has trailed behind more than 300 constituents within the S&P 500, including smaller-cap companies such as Dollar Tree and Hubbell.
Ken Mahoney, CEO of Mahoney Asset Management, noted that companies like Meta Platforms, Inc., Amazon.com, and Microsoft have been primary financiers of AI infrastructure build-out. He stated that the market is not convinced by their massive deployment of free cash flow into AI without a clear timeline for returns.
As pressure mounts to meet year-end targets, firms including Morgan Stanley, Goldman Sachs, and JPMorgan have indicated over the past two weeks that the Magnificent Seven's underperformance relative to chip stocks and the broader market has become excessive.
In a research note this Tuesday, Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, wrote that the semiconductor sector is "severely overbought" and it is time to re-evaluate the potential opportunities within the Magnificent Seven. She highlighted that while order backlogs and pricing power expansion for semiconductor manufacturers and memory suppliers are impressive, she views this trend as unsustainable.
Shalett clarified she is not predicting the end of the current cycle but is advocating for a re-diversification into potential AI infrastructure beneficiaries, suggesting "re-embracing some of the hyperscale cloud providers."
Alonso Munoz, Chief Investment Officer at Hamilton Capital Partners, pointed out that from current levels, it would be difficult for the S&P 500 to advance further without participation from the Magnificent Seven, as other sectors that have rallied significantly, such as energy, also face potential pullback pressure. These names carry significant influence over the index's movements.
Valuations Return to Historically Low Premiums, Enhancing Appeal for Reallocation
The ongoing correction in the Magnificent Seven this year has significantly improved their valuations. Data shows the group's price-to-earnings ratio has fallen to 23.9 from 32.6 at the end of October last year. Last month, the group's valuation premium relative to the S&P 500 narrowed to just 2.4 times, nearing its historical low.
Rich Privorotsky, a partner at Goldman Sachs, remains highly optimistic about the AI outlook but is "far from convinced" about the market's current focus within the value chain. He believes that once scarcity diminishes, owning the AI platform will hold an advantage over owning the hardware. In his words, hyperscale cloud providers "own the toll road itself, not just the cars on it."
Some market participants argue that the S&P 500 could still achieve its year-end target without a resurgence from the Magnificent Seven.
Sameer Samana, Senior Global Market Strategist at Wells Fargo Investment Institute, noted that the S&P 500's other constituents are up about 14% year-to-date excluding the seven giants, suggesting the broader market could rely on the rest of its components to reach the goal.
Melissa Brown, Global Head of Applied Research at SimCorp, also stated that the S&P 500 "could potentially achieve" the 7,824.09 year-end target with its other components. However, she added that given their lower weightings, these stocks would need to post even larger gains to pull the overall index up to that level.
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