To The Moon

Over the past three years, bets on artificial intelligence companies have dominated the US stock market, driving a 78% surge in related sectors. Now, a growing number of investors believe the rally led by the "Magnificent Seven" is nearing its end. Growing concerns about whether AI can bring disruptive change to the US economy and the accompanying hefty profits are turning investors' previous fervor for the technology into anxiety. Capital is beginning to flow into stocks of the "remaining 493 companies" in the S&P 500 index, particularly those expected to benefit most from an anticipated economic recovery. "I call this phenomenon 'AI aesthetic fatigue'," said Ed Yardeni, President and Chief Investment Strategist of Yardeni Research. "I'm tired of it, and I suspect many others are also wary of the topic." A reversal of this trend would signal the end of a historically concentrated bull run in US stocks dominated by such a small group of companies. Since OpenAI's ChatGPT captured global investor attention in 2022, the combined market capitalization of NVIDIA, Microsoft, and Apple has grown by trillions of dollars. Google's parent Alphabet and Meta Platforms have also performed strongly, while secondary tech players like Broadcom and Oracle have ridden the wave. This shift in market sentiment, while subtle, has been underway since the S&P 500 hit a record high in late October and began declining in November. As of Monday's close, the Bloomberg "Magnificent Seven" index had fallen 2% since October 29th, while an index of the other 493 S&P 500 constituents had risen 1.8%. Market capital is rotating from high-momentum stocks into more defensive and reasonably valued sectors. The newly launched Excellence Large Cap Ex-Magnificent Seven ETF (ticker: XMAG) saw six consecutive months of net inflows at the end of 2024, with December inflows quadrupling those of November. This ETF gained 15% for the full year, with most of the gains occurring in the final six months. Yardeni noted that the performance of the other 493 S&P 500 stocks in 2025 has been "impressive." The strategist mentioned that despite the establishment of a US government efficiency department, the implementation of Trump administration tariffs, and signs of labor market weakness, the profit margins of these companies have remained high without "shrinking." If economic conditions improve, the prospects for cyclical and growth-oriented industries will also brighten, offering ample opportunities for investors hoping to move beyond the era dominated by mega-cap tech stocks. Lenders like JPMorgan Chase and Bank of America could see earnings growth; as consumer confidence recovers, people will be more willing to buy Nike sneakers or book vacations through Booking Holdings, benefiting consumer discretionary stocks. However, historical precedent suggests that the end of the "Magnificent Seven's" dominance would likely involve a period of market turbulence, posing significant risks. "The ideal outcome for this bull market would be a smooth transfer of leadership to the broad camp of the other 493 S&P 500 constituents," said Doug Peta, Chief US Investment Strategist at a US business cycle analysis firm. "Yet, historically, highly concentrated bull markets led by a few strong stocks have rarely transitioned so smoothly." Peta pointed to the demise of the "Nifty Fifty" concept stocks on Wall Street in the 1970s as an example, noting that when long-leading stocks falter, the entire market often follows into a bear market. Despite concerns about unsustainable capital expenditure and high current valuations, Peta believes the AI investment boom is not over. Meanwhile, investors in the AI space have become more cautious. The homogenous rally where any stock associated with AI would surge has now fragmented, with former AI darlings like Oracle experiencing significant declines. "In my view, the reign of the 'Magnificent Seven' is not over—I would be surprised if they don't have one final rally. However, once that concludes, the US market will likely need to go through a significant bear market before new leaders emerge," Peta said. Yardeni is more pessimistic about the prospects for AI-related investments, believing the seeds of this "aesthetic fatigue" were sown by a cryptic warning from prominent fund manager Michael Burry in late October. Burry later disclosed short positions against NVIDIA and Palantir Technologies. Other institutions have also warned that the dominance of large tech stocks may soon end. A core view in Wall Street strategists' 2026 outlooks is that the heyday of the "Magnificent Seven" is concluding. Last month, strategists at Goldman Sachs Group said they expect the "Magnificent Seven's" contribution to S&P 500 earnings growth to fall to 46% in 2026, down from 50% in 2025. Meanwhile, earnings growth for the other 493 S&P 500 constituents is expected to accelerate to 9% in 2026 from 7% in 2025. The other 493 S&P 500 stocks may also attract value investors. Goldman Sachs strategists, led by Ben Snider, believe significant valuation dispersion coupled with a favorable macroeconomic outlook provides strong support for value stocks. "In terms of sectors, the Healthcare industry's valuation is low relative to both its own history and its earnings level, further justifying an overweight position," Snider wrote in a report dated January 6th. "Beyond that, we also recommend overweighting Materials, Consumer Discretionary, and Software & Services sectors."