Wall Street is terrified of a trillion-dollar AI bill - but the payoff is in sight
Investors are grappling with the cost of building the AI future that it's been so eager to believe in.
It's time to retire the 'Magnificent Seven' as an investing category.
For most of this bull market, skeptics have had a simple complaint: "It's only seven stocks." The so-called "Magnificent Seven" tech stocks were propping up the market, and if they stumbled, the bull run would implode.
Now the problem has flipped. The "Mag 7" is becoming the "Lag 7." And because of their size, these former leaders have become the market's biggest headwind.
But that doesn't mean the AI boom isn't real or that the bull market is over. The problem is the market is finally grappling with the cost of building the AI future that it's been so eager to believe in. That dynamic is creating a new basket of winners and losers.
Wall Street is focused on the cost, not the payoff
The hyperscalers - Microsoft $(MSFT)$, Amazon.com (AMZN), Alphabet $(GOOGL)$ $(GOOG)$, Meta Platforms (META) and Oracle $(ORCL)$ - plan to spend close to $1 trillion on capex in 2027, according to Goldman Sachs.
This enormous spending on chips, networking, power and data centers will prove rational over time and trigger a massive earnings and cash-flow boom, beginning in 2028. But in the meantime, it's a headwind as investors fear one of the dirtiest words in investing: dilution.
Alphabet's recent equity issuance is a good example. The company issued stock for the first time since its IPO in 2004 to fund its AI buildout. That marked the near-term high for the stock and the broader market as investors reckon with the true cost of the AI arms race.
This fear has pushed the "Magnificent Seven" tech stocks to their lowest premium relative to the S&P 493 in a decade. Valuations have also been compressed to their lowest in years despite record earnings growth. This combination of lower relative valuations and strong earnings growth is one of the strongest arguments against the idea that this AI boom is a bubble.
Bubble or not, the reality is these once market leaders are struggling under the weight of the spending required to fund the AI buildout. That is a real headwind, although not a fatal one. And for those with a stomach for volatility, this dynamic is creating massive opportunities.
This is not the end of the bull market
In my view, the market is discounting the near-term hit to free cash flow faster than it is rewarding the longer-term earnings power this spending is likely to create. We've seen this before, particularly when Amazon sacrificed years of cash flow to build its now-powerhouse Amazon Web Services business.
And this time around, there is already evidence that AI monetization is beginning to show up and accelerate. In the most recent earnings cycle, Amazon saw its fastest AWS growth in four years thanks to AI demand; Microsoft's AI business more than doubled and already had a $37 billion run rate. It was a similar story with Alphabet, with CEO Sundar Pichai saying enterprise AI was the "primary driver" behind its cloud division's momentum and booming backlog.
That matters because the market is often too impatient with spending cycles. It sees the hit to today's free cash flow immediately, but it is slower to fully capitalize on the earnings stream that spending can produce two or three years later. The result is a short-term air pocket in the very stocks that led the first half of the rally.
RIP to the 'Magnificent Seven'
From here, market leadership is likely to become much more selective.
This isn't the end of market leadership from Big Tech. But much like "FAANG" was all the rage in the market in the 2010s, it's time to retire the "Magnificent Seven" as an investing category.
It was a convenient label for a moment when a small group of giant tech stocks were all moving in the same direction for roughly the same reason. That is no longer the case.
From here, leadership is likely to become much more selective.
Some hyperscalers - like Alphabet and Amazon - still look well-positioned because they are already monetizing AI in a visible way. Other megacap names look less compelling, either because they have less direct AI leverage (i.e. Tesla (TSLA)) or their growth is driven by something other than AI (i.e. Apple (AAPL)).
New opportunities
Some of the best opportunities in the market right now stand apart from the 'Magnificent Seven.'
Some of the best opportunities in the market right now stand apart from the "Magnificent Seven."
AI hardware and infrastructure names including Micron Technology $(MU)$ and ASML Holding $(ASML)$ remain important because they sit closer to the AI buildout itself. And outside of AI, the U.S. market is broadening into once-ignored sectors, including liquid leaders in healthcare, payments and financials such as Eli Lilly $(LLY)$, Visa (V) and JPMorgan Chase $(JPM)$. These stocks may end up doing more of the index-carrying work from here than investors expect.
So while the stock market has a "Mag 7" problem, it's not the same problem the bears were warning about. The problem has transformed from "It's only seven stocks" to investors punishing those companies for the cost of building what may become the next great earnings engine.
While that puts short-term pressure on the old generals, it's creating room for new leadership to emerge. That's what the next phase of a bull run looks like, not the end of one.
Robert Ross is the founder of TikStocks and author of "A Beginner's Guide to High-Risk, High-Reward Investing" (Adams Media, 2022). A former chief equity analyst at Mauldin Economics, Ross writes the investment newsletter Let's Analyze on Substack and hosts the weekly "Room to Run" podcast. Ross currently owns shares of Microsoft, Alphabet, Amazon, Micron Technology, ASML and Eli Lilly.
-Robert Ross
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(END) Dow Jones Newswires
July 16, 2026 07:51 ET (11:51 GMT)
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