Should We Still Blindly Chase the 'Magnificent Seven'? Strategist: AI's New Winners Are Redefining the Market Landscape

According to Yahoo Finance, the so-called 'Magnificent Seven' tech stocks that have driven U.S. equity markets in recent years may now be officially fading into history. Citi strategist Scott Chronert recently stated bluntly that the term has lost its luster.

The Magnificent Seven refers to Apple (AAPL-US), Alphabet (GOOGL-US), Microsoft (MSFT-US), Amazon (AMZN-US), Meta (META-US), Tesla (TSLA-US), and Nvidia (NVDA-US).

As the artificial intelligence (AI) revolution continues to unfold, new market winners are emerging. These companies are rapidly rising in terms of earnings growth and market influence, gradually eroding the dominance once held by the Magnificent Seven. This shift is prompting investors to search for the next set of market-defining stars.

In his latest report, Chronert wrote, 'At this stage of AI development, describing the market as the 'seven versus the other 493' is misleading. This framing suggests that the remaining 493 companies in the S&P 500 collectively drove index gains and earnings growth, but in reality, it's a select group of large-cap companies outside the Magnificent Seven—those benefiting from AI infrastructure buildouts—that are truly driving the market.'

He therefore recommends expanding the Magnificent Seven to better reflect the AI investment theme, adding Broadcom (AVGO-US), Micron (MU-US), and AMD (AMD-US). He notes that this new 'Magnificent Ten' not only fills the performance gap left by the original seven but is also expected to contribute more than half of the consensus forecast for S&P 500 earnings growth in 2026.

However, Chronert acknowledges that even this expanded 'Ten' does not fully capture all AI beneficiaries. Companies like Intel (INTC-US), Applied Materials (AMAT-US), Cisco (CSCO-US), and Lam Research (LRCX-US) are also significant contributors to earnings growth.

Year-to-date, all members of the Magnificent Seven except Alphabet have underperformed the S&P 500 index. Alphabet has risen 11% year-to-date, outpacing the S&P 500's 8.3% gain over the same period.

Wall Street is becoming increasingly impatient with the massive capital expenditures (capex) of large tech firms in the AI space. Market estimates suggest that AI-related capex by major tech companies will grow 70% year-on-year this year, exceeding $700 billion in total.

These massive investments are primarily directed toward AI data centers and high-end GPUs, but they are significantly compressing corporate cash-generating capacity. The market expects the Magnificent Seven's projected free cash flow over the next 12 months to decline sharply from its 2024 peak.

Jim Reid, a strategist at Deutsche Bank, warned in a report, 'There is growing concern in the market about the capital spending of hyperscale cloud providers.'

In conclusion, the Magnificent Seven are no longer the seven stocks investors should blindly follow. Both market data and fundamental logic indicate that the era of the Magnificent Seven is beginning to change.