The end of the Mag7 bubble may be a slow deflation rather than a dramatic bang.
- The Magnificent Seven has lagged the wider market since the start of the year
- Even in 2025, only two of the Mag 7 outperformed the market – Nvidia and Alphabet
- Ballooning AI investment is spooking investors
Any unwinding of the dominant AI trade has tended to be seen in explosive terms. The Dotcom bust looms large in investors’ memories and the assumption has been that if the AI excitement ends, it will end with a bang. More likely is a slow deflation as investors’ expectations return to normal levels. It may have started already.
The Magnificent Seven has lagged the wider market since the start of the year. The CNBC Mag 7 index is up just 1% in January, compared to 1.9% for the S&P 500 index, 2.3% for the FTSE 100 and 2.4% for the MSCI ACWI Europe ex UK. Smaller companies have also been flying since the start of the year, with the average UK Smaller Companies fund up 5.5% and the average North American Smaller Companies fund up 3.9%.
Even in 2025, only two of the Mag 7 outperformed the market – Nvidia and Alphabet. They finished 2025 up 38.9% and 65.4% respectively. Both companies are emerging as the winners from AI. Nvidia was a beneficiary of the vast spending on AI infrastructure, while Alphabet has shored up its search business by integrating AI into its results.
Elsewhere, the picture has been more complicated. Tesla saw its annual revenue fall for the first time in the fourth quarter of 2025. Revenue came in 3% lower for the year as a whole. CEO Elon Musk said Tesla would end production of its premium S and X models next quarter, converting factories to produce Optimus robots instead.
For Meta and Microsoft, ballooning AI investment has spooked investors. Microsoft, for example, reported a respectable 17% increase in revenues to a record $81bn for the fourth quarter, but a 66% surge in capital spending revived debate on AI’s return on investment. Meta has also hit this problem over the past 12 months. Companies that once looked cash generative and capital-light have taken on debt to fuel AI spending, which has changed the calculations for investors.
The Mag7 is also losing its earnings edge over the rest of the market. Data from FactSet shows that the Mag7 outpaced the rest of the S&P 500 on earnings by 20.3% versus 4.1% in the fourth quarter. However, looking forward, the estimated earnings growth rate for Mag7 for 2026 is 22.8%, and 12.1% for the remainder of the market. Given the relative valuations, this narrowing could prove important.
The momentum behind the Mag7 is slowing. They have also been caught up with a growing nervousness over US assets in general. Yet the potential for AI has sufficient appeal that investors are unlikely to abandon the sector wholesale. Investors may see a slow eroding of its relative strength rather than a dramatic implosion.
