WSJ: 'Magnificent Seven' Lose Luster as Ordinary Investors Shift to New AI Contenders

If the artificial intelligence (AI) boom is a new gold rush, then Alex Cardona is hoping to strike gold in places beyond the traditional hotspots. The 50-year-old software company director is doing just that, allocating a significant portion of his investment portfolio to AI infrastructure firms such as data center operator Equinix and semiconductor company Marvell Technology. The so-called 'Magnificent Seven'—the mega-cap tech stocks that once drove U.S. market gains—hold little weight in his investment list. Cardona says he holds only minimal positions in these stocks, preferring instead to deploy his capital elsewhere. "By investing in pure-play concepts, I can chase targets like Marvell—smaller companies that many people may not have heard of," he said. The chipmaker is the top-performing stock in his portfolio, having surged over 120% this year. "My vision is to buy the infrastructure that powers AI."

The long-standing retail investor enthusiasm for the largest tech stocks is beginning to cool. Purchases of shares in Microsoft, Apple, Amazon.com, Meta, Nvidia, Alphabet, and Tesla are declining. Data from Vanda Research, a firm that tracks capital flows, shows retail investors are now shifting toward newer AI-related trades, such as chip stocks like SK Hynix or the Roundhill Memory exchange-traded fund (ETF).

This shift reflects a broader market transformation. These seven leading tech giants are, at least temporarily, ceding the spotlight to chipmakers, memory suppliers, and smaller companies tied to AI development. So far this year, all but two of the 'Magnificent Seven' have underperformed the broader market. Microsoft has fared the worst, down 19% year-to-date, while Apple leads with a 23% gain.

Last Friday, the risks of chasing quick gains in other sectors became evident when news of a new model launch by China's Moonshot AI triggered Wall Street panic. Tech stocks across the board fell, with AI infrastructure names hit particularly hard. The Philadelphia Semiconductor Index dropped 1.6%, falling more than 20% from recent highs and entering bear market territory.

Like Cardona, many retail investors still maintain significant exposure to the 'Magnificent Seven,' given that these companies collectively account for 36% of the S&P 500's total market capitalization. Yet, they are increasingly funneling money into lesser-known stocks, hoping they will emerge as the next AI superstars. "Retail investors are no longer buying the 'Magnificent Seven.' They're picking winners," Vanda analysts wrote in a report last week. Vanda data shows that since July, retail investors have net purchased $52 million in Microsoft stock, making it the most favored among the 'Magnificent Seven.' In contrast, they poured $194 million into Intel and $56 million into IREN, an AI cloud services company.

For years, ordinary investors have been the most loyal and enthusiastic supporters of the 'Magnificent Seven.' Whether during the early days of the AI arms race, the DeepSeek panic in early 2025, or last spring's tariff turmoil that shook Wall Street, they poured into these stocks en masse. But recently, members of this giant cohort have begun to diverge. Over recent months, retail investors have shifted their focus. Instead of fixating on trillion-dollar giants funding AI development, they are turning toward companies that manufacture the chips, cooling systems, and power infrastructure needed for AI.

"For years, the 'Magnificent Seven' were the darlings of the market," said Bret Kenwell, U.S. investment analyst at eToro. Now, he says, retail investors are "following the money, both metaphorically and literally."

This doesn't mean retail investors are exiting the market. Scott Rubner, head of equities and equity derivatives strategy at Citadel Securities, said retail trading activity in May and June hit record highs. Daily average stock trading volume during these two months was more than double the 2024 average.

Even before last Friday's sharp decline, the AI boom's momentum had already stalled on Wall Street. The once red-hot semiconductor rally has cooled. Major U.S. stock indexes are trading sideways in a typical summer slowdown. Investors are now turning to second-quarter earnings reports, eagerly searching for concrete evidence that AI investments are beginning to show up on corporate balance sheets.

"The market is looking for more proof that AI is driving revenue growth or boosting productivity," said Jonathan Cofsky, portfolio manager for Janus Henderson's global technology and innovation team. "To justify such high levels of spending, you need to see returns materializing broadly across the economy."

Ultimately, all AI-related stocks face similar concerns. Last Friday, small-cap chipmakers, software firms, and 'Magnificent Seven' stocks all fell in unison.

To some traders, the potential returns justify the risk. Davis Cantrell, a college student near Atlanta with about two years of investing experience, has closely followed the top players in the AI space during that time. But recently, the 19-year-old reduced his Microsoft holdings, sold all his Nvidia stock, and rotated his capital into what he sees as more promising corners of the market: space and quantum computing. He believes these two industries are poised for liftoff as the AI revolution deepens.

Cantrell says large-cap tech stocks are still solid investments. But the most exciting part of that feast is over. "I'm looking for more aggressive, higher-risk growth stocks," he said. "I just feel like Microsoft and Nvidia are no longer in that camp."