What was once the most crowded bullish trade is now becoming a major burden dragging down the US stock market.
The Magnificent Seven have collectively lost momentum this month, with each of the seven stocks falling between 3% and 8% over the week, while the Nasdaq index declined by approximately 4%. During the same period, both the Dow Jones Industrial Average and the Russell 2000 small-cap index outperformed. This marked the Nasdaq's worst week relative to small-cap stocks since July 2024.
The logic behind this divergence is straightforward: the Magnificent Seven account for over 30% of the S&P 500's total market capitalization. When more than 30% of an index's market value falls by over 5% in a week, the remaining components simply cannot compensate. This explains why the broader market index still declined, even though eight of the eleven major sectors posted gains for the week.
This month, the combined market value of the Magnificent Seven has evaporated by roughly $3 trillion. The Roundhill Magnificent Seven ETF, which tracks these seven stocks, has fallen 13% in June, which, according to Dow Jones Market Data, would be its worst monthly performance since its inception in April 2023. In contrast, the Defiance Large Cap ex-Mag 7 ETF, which tracks the rest of the S&P 500, has gained 2.6% over the same period.
Why Did Positive Macro Data Fail to Support Mag 7?
This week's macroeconomic data should, in theory, have boosted risk assets.
Goldman Sachs strategist Chris Hussey analyzed that at least five positive factors emerged simultaneously this week: the reopening of the Strait of Hormuz, with oil prices falling about 10% for the week; May core PCE inflation rising 0.32% month-over-month, in line with expectations; Micron Technology releasing strong earnings, with its stock rising over 4% against the trend; the 10-year Treasury yield falling more than 10 basis points to 4.37%, traditionally supportive for stock valuations; and Goldman Sachs chief economist Jan Hatzius reiterating the view that the Federal Reserve will not cut interest rates this year.
However, the VIX remained around 20 all week, and the Magnificent Seven continued to face pressure.
The reason lies not in macro issues, but in structural ones.
Reversal of a Crowded Trade: Leaders Become Laggards
The predicament of the Magnificent Seven is essentially the outcome of a "loosening of a crowded trade."
Over the past three years, "going long on the Magnificent Seven" was the market's most crowded trade. Bank of America analyst Michael Hartnett coined the term "Magnificent Seven" in 2023. At that time, these seven stocks led investors out of the 2022 bear market and subsequently outperformed the S&P 500 until 2025.
But in 2026, the market's favorites have changed.
Chip and hardware suppliers in the upstream AI supply chain have risen strongly. According to data from financial software firm Hazeltree, memory chip maker Micron Technology has seen its market value approach that of Meta Platforms, Inc. following its impressive earnings report. Chip equipment maker Applied Materials and semiconductor giant Broadcom ranked as the second and third most crowded long positions among hedge funds last month.
Marta Norton, chief investment strategist at Empower, stated, "Against the backdrop of a historic surge in chip stocks and persistent weakness in software stocks, the equity market seems to have completely forgotten the Magnificent Seven."
A clear divergence is emerging within the AI ecosystem—the "AI payers" (i.e., hyperscale cloud providers) and the "AI payees" (i.e., chip and computing power suppliers) are moving in significantly different directions, while non-AI sectors gained 2.2% for the week.
Individual Troubles for Each Company
The decline of the Magnificent Seven is not uniform; each company faces its own pressure points.
Amazon, Meta Platforms, Inc., Microsoft, and Alphabet are pouring vast sums into AI infrastructure construction; NVIDIA faces a new wave of chip competition; Apple is under pressure from rising memory prices; and Tesla Motors remains as volatile as ever.
Within Elon Musk's business empire, Tesla Motors is no longer even his largest publicly traded company by market value. SpaceX's record-breaking IPO two weeks ago has also diverted market attention.
Kimberly Forrest, chief investment officer at Bokeh Capital Partners, noted that the Magnificent Seven are still giant companies capable of generating "huge amounts of cash," but "now they also have 'big, grand worries.'"
The Logic Behind Valuation Discounts: It's Not 2023 Anymore
The relative discount of the Magnificent Seven has a fundamental basis.
The forward valuation multiples for some Magnificent Seven stocks now offer only a thin premium relative to the S&P 500. But this does not mean they are cheap—measured by price-to-sales ratios, these companies are still valued at about 11 times historical sales, far above the level implied by the roughly 47 times price-to-earnings ratio of the 1970s "Nifty Fifty" at its peak.
Wall Street Journal columnist Spencer Jakab drew a historical analogy: the 1970s "Nifty Fifty" were similarly the market's most crowded "one-decision" stocks of their time. In 2023 and 2024, the Magnificent Seven contributed more than half of the S&P 500's gains. However, after the "Nifty Fifty" significantly underperformed the market in the mid-1970s, they did not fully recover their losses until 1997—a full 25 years later.
Jakab wrote, "Sentiment trumps valuation in the short term." He also cited Cisco as an example: Cisco became the world's largest company by market value in 2000, with an excellent CEO, market dominance, and continuous sales growth, yet its stock price only returned to its peak last year—a full quarter-century after its high.
His conclusion is: "There is no such thing as a 'one-decision' stock."
Unusual Volatility Signals: QQQ Near Highs, But Market Acts Stressed
From a technical perspective, current volatility signals are quite unusual.
According to analysis from SpotGamma, the Invesco QQQ Trust (tracking the Nasdaq-100) is only about 5% from its all-time high, yet its implied volatility is behaving at levels similar to when the Iran conflict initially escalated in March this year. This round of volatility was not triggered by a market crash, but rather by several sharp reversals within June following a rapid price surge from May to June.
A significant divergence has emerged between the Nasdaq's "VIX" and the S&P 500's "VIX," with the former being much higher than the latter.
According to observations by Bloomberg analyst Michael Ball, options and leveraged ETFs are turning the S&P 500 into a "two-way volatility machine"—hedging and rebalancing flows are accelerating, rather than smoothing, the market's directional moves.
The current sell-off resembles more of a "concentrated unwinding of crowded positions" than a broad macro de-risking. Selling proceeds from AI leaders are flowing into value and quality stocks, as well as previously lagging hyperscale cloud providers and software stocks.
Mag 7 Gains Favor in Bonds, But Stock Investors Shouldn't Necessarily Follow
Interestingly, while the Magnificent Seven have fallen out of favor in the stock market, they are gaining popularity in the bond market.
AI cloud giants like Alphabet, Microsoft, Meta Platforms, Inc., and Amazon have begun issuing hundreds of billions of dollars in bonds to fund chip purchases and data center construction. Marta Norton stated that the Magnificent Seven have become the "new darlings" of the fixed income market.
But this does not mean equity investors should switch to corporate bonds. It was noted that the forward valuations of some Magnificent Seven stocks are approaching the overall level of the S&P 500, presenting some attractiveness.
The core issue is that this is no longer 2023—a time when these companies were growing rapidly with almost no questions about capital expenditures or competition. According to Goldman Sachs analyst Ben Snider, investors now need to balance "stronger-than-expected AI capital expenditures" against "the risk of a potential spending slowdown" and "uncertainty about the sustainability of near-term profitability."
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