According to analysis, Apollo Global Management LLC indicates that the investment thesis for the "Magnificent Seven" U.S. stocks is beginning to lose some of its fundamental support as investors shift their focus towards high-quality assets and free cash flow.
Apollo's Chief Economist, Torsten Slok, noted that the market is gradually moving away from the trend that has been dominated by mega-cap technology stocks in recent years.
The most critical pressure point currently is free cash flow. Data shows that the expected free cash flow (FCF) for the next 12 months of hyperscale cloud computing companies has declined significantly from its 2024 peak and is projected to fall further in 2026.
This decline reflects the ongoing and substantial investments required to support artificial intelligence (AI) infrastructure development.
Charts provided by Apollo show that the proportion of capital expenditures to operating cash flow is rising for companies including Amazon (AMZN.US), Alphabet (GOOGL.US), Microsoft (MSFT.US), Meta Platforms (META.US), and Oracle (ORCL.US).
This indicates that AI investments are increasingly eroding these companies' cash generation capabilities, a factor that has been a key support for their high valuations.
Concurrently, the profit growth advantage of the "Magnificent Seven" is also narrowing.
Apollo points out that the earnings growth gap between the "Magnificent Seven"—Apple (AAPL.US), Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia (NVDA.US), and Tesla (TSLA.US)—and the remaining 493 companies in the S&P 500 index is gradually closing.
Forecasts suggest that the earnings per share (EPS) growth rate for the "Magnificent Seven" is expected to slow to 20% in 2026 and further decline to 15% in 2027.
In contrast, the EPS growth rate for the other 493 S&P 500 companies is projected to be 11% in 2026 and 15% in 2027.
This shift is significant because the market has consistently awarded the "Magnificent Seven" a higher valuation premium, primarily based on the expectation that their profit growth, profit margins, and balance sheet strength would continue to significantly outpace the broader market.
However, if this leading advantage continues to shrink while AI capital expenditure continues to pressure free cash flow, the rationale for investors to continue granting this group a high valuation premium will diminish.
Nevertheless, Christian Mueller-Glissmann, a Goldman Sachs strategist and head of asset allocation research, holds a different view.
He suggests that amid recent intense volatility in chip stocks, large-cap technology stocks might be becoming a more attractive allocation within the AI investment theme.
Mueller-Glissmann noted that while the primary drivers of the market rally have been chipmakers and beneficiaries of AI capital expenditure rather than hyperscale cloud companies, the chip sector is actually the most volatile part of the entire AI supply chain.
This sector not only has highly concentrated investor positioning but has also accumulated significant leverage through instruments like exchange-traded funds (ETFs) and options.
Mueller-Glissmann stated, "If you still believe the AI trend will continue positively, you should diversify appropriately into hyperscale cloud companies and perhaps reduce exposure to the chip sector, as it is the most volatile part of the entire AI capital expenditure chain."
Regarding the significant rally in chip stocks, Mueller-Glissmann added, "To some extent, appropriately reducing exposure to this sector and diversifying investments might be a reasonable choice."
Investment bank Wedbush also believes that while concerns about rising capital expenditure and the potential for computing and storage costs to reach a tipping point may be driving the current U.S. stock market pullback, it will present new opportunities for patient investors.
Upon closer examination, Wedbush stated that the market is currently in a "temporary air pocket stage."
The massive $700 billion in capital expenditure by tech giants this year is largely directed at advancing AI infrastructure, but investors in these large tech companies—particularly shareholders of Microsoft and Meta—are growing increasingly frustrated.
In a note to clients, Wedbush wrote, "Essentially, we are in a 6-to-12-month window where data center and computing infrastructure construction is rapidly advancing. However, large tech giants like Microsoft, Meta, and to a lesser extent, Amazon and Alphabet, are currently in a waiting phase, hoping to see the real wave of growth and commercial monetization emerge."
Further analysis by Wedbush indicates that this issue has affected all hyperscale cloud service providers, including Alphabet, which was considered the "golden child" of this group just weeks ago.
Recent departures of several AI researchers from the company have further heightened investor concerns.
Meanwhile, Meta may be at a critical juncture in its business transformation, but the company, led by Mark Zuckerberg, is investing heavily, and investors appear increasingly unwilling to wait for the final results of this transformation.
Additionally, Apple's announcement this week of significant price increases for its products may have delivered a negative shock to the market.
Investors are beginning to question whether computing and storage costs have become unsustainably high and if AI infrastructure development needs to slow down.
However, Wedbush explained, "We believe these costs will begin to gradually decline over the next year. With the massive proliferation of AI consumer hardware, physical AI deployments, and enterprise AI applications in the coming years, today's concerns will become distant memories, much like the construction of the Las Vegas Strip in the 1950s, which seemed costly at the time but ultimately created long-term value."
Wedbush concluded, "Overall, many trading days make it feel like the current tech market is filled with confusing price movements. But in our view, this precisely creates mismatches and opportunities, allowing investors to position in the true winners within this tech and AI bull market, which still holds long-term growth potential."
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