Can the Magnificent Seven Recover in H2?

For several quarters, every earnings season has precipitated a slew of articles announcing the end of the reign of the so-called magnificent seven: Nvidia [NVDA], Alphabet [GOOGL], Apple [AAPL], Microsoft [MSFT], Amazon [AMZN], Tesla [TSLA] and Meta Platforms [META]. Such articles usually point out that the emperor is, in fact, naked, and predict an imminent collapse in valuations.

The recently concluded earnings season was no exception. 

This time, however, things are looking a little different. There is a growing consensus across the mainstream that the magnificent seven are indeed losing momentum, and that we are in the midst of a very healthy – indeed, overdue – market diversification. 

This stock analysis will begin with a quick recap of how the magnificent seven came to occupy their current position of dominance, unpack why they could be ceding that position now, and ponder whether the next phase of the artificial intelligence (AI) investment cycle may offer an opportunity to retake it. 

Rise to dominance

For the benefit of any readers who recently completed a three-year digital detox, here is a quick timeline of how the magnificent seven stocks came to enjoy such prominence. 

In the 2010s, the market was driven by the “FAANG” stocks (Facebook, Amazon, Apple, Netflix [NFLX] and Google). However, as the digital landscape shifted and the massive AI boom began in late 2022, investor focus expanded to include Microsoft and Nvidia, while Netflix fell out of the top tier of mega-cap growth. 

The term ‘magnificent seven’, borrowed from the classic western, first gained widespread currency in 2023. At the time, the comparison was well-deserved. After the sharp sell-off of 2022, investors piled back into large-cap technology stocks as inflation eased, interest rate expectations stabilised and enthusiasm around AI reached fever pitch.

The catalyst was Nvidia’s extraordinary emergence as the dominant supplier of AI accelerators following the launch of generative AI models such as ChatGPT. Demand for AI infrastructure rapidly spread throughout the technology ecosystem. Microsoft deepened its partnership with OpenAI, Alphabet accelerated development of its own AI models, Meta dramatically increased capital expenditure on AI infrastructure and Amazon expanded its cloud AI offerings. 

Even Apple, despite arriving later to the AI party, benefited from investors’ belief that AI features would eventually drive a new hardware upgrade cycle. Tesla remained something of an outlier, with its inclusion reflecting both its market cap and investor optimism surrounding autonomous driving and robotics, rather than AI infrastructure itself.

Together, these seven companies came to account for an unprecedented share of both the S&P 500’s market capitalisation and its earnings growth, making them increasingly synonymous with the US equity market itself.

AI capex concerns extend dip

However, as the market entered 2026, the narrative began to shift. While the magnificent seven continued to report robust earnings, investors became noticeably more discerning about what justified premium valuations. Simply mentioning AI was no longer enough; markets increasingly demanded evidence that enormous capex would translate into sustained revenue and profit growth.

Signs of divergence began to emerge, and it seemed that the seven stocks could no longer be treated as a single winning basket. 

Nvidia remained the clear beneficiary of relentless demand for AI infrastructure, but several of its peers faced tougher questions. Apple struggled to convince investors that its AI strategy would accelerate iPhone sales, while Tesla continued to grapple with slowing electric vehicle demand and intensifying competition. Alphabet and Microsoft both posted solid results, but investors increasingly focused on whether soaring AI investment was outpacing monetisation.

At the same time, the market began to broaden. Lower interest rates, improving economic data and stronger earnings across sectors encouraged investors to rotate into financials, industrials, healthcare and smaller technology companies that had lagged during the AI-driven rally. By May, it was becoming increasingly apparent that market leadership was no longer as concentrated as it had been throughout the previous three years.

Who supplies the suppliers?

A quick look at the top-performing stocks in the S&P 500 so far this year reveals a telling pattern. Sandisk [SNDK], Dell Technologies [DELL], Micron Technology [MU], Western Digital [WDC], Intel [INTC], Seagate Technology [STX], Marvell Technology [MRVL], Flex [FLEX], Applied Materials [AMAT] and Corning [GLW] all provide essential AI hardware. The biggest beneficiaries of the AI boom are no longer necessarily the companies at the centre of the story, but rather the businesses supplying them with the infrastructure needed to keep expanding.

As Sherwood News’ Luke Kawa pointed out on X at the end of June, most of these top-performing stocks have magnificent seven members in their top five customers, according to data from Bloomberg’s Supply Chain.

Sandisk counts Nvidia among its five largest customers, while Seagate Technology supplies Microsoft. Dell lists Amazon as its tenth-largest customer. Micron Technology has both Nvidia and Microsoft among its top five, while Corning counts Apple among its key customers – alongside Samsung Electronics [SSNLF], another major player in the broader AI hardware supply chain.

Western Digital is similarly tied into the AI spending cycle through relationships with Amazon, Meta Platforms and Microsoft, while Flex includes Microsoft, Amazon and Alphabet among its largest customers.

Marvell Technology stands out as perhaps the clearest example of this second-order AI opportunity: four of its top five customers are members of the magnificent seven.

The main exceptions among the top-performing stocks are Applied Materials and Intel. Even here, however, the connections remain clear. Intel’s seventh-largest customer is Microsoft, while Applied Materials supplies many of the semiconductor giants driving the AI buildout, including SK Hynix [000660:KS], Samsung Electronics, Micron Technology, Taiwan Semiconductor Manufacturing Company [TSM] and Intel itself.

The takeaway is that the AI investment boom is no longer just a story about the headline names. It has created an increasingly broad ecosystem of beneficiaries – many of which sit further down the supply chain, providing the chips, storage, networking and manufacturing equipment required to support the next phase of AI growth.

As Sherwood News pithily framed it, “your massive capex are someone else’s massive sales beat”.

Then, of course, there is the emergence of SpaceX [SPCX], as well as the mooted IPOs of OpenAI and Anthropic. It is still too early to tell what effect this could have on the tech big leagues, but it is sure to be transformational.

A M7 recovery in H2?

Is this forever? Have the ‘picks and shovels’ stocks permanently surpassed the first movers, with the magnificent seven doomed to become corpulent dinosaurs on the fringes of the tech revolution they helped start?

Opinion is divided. 

At the end of June, Dan Ives – then still with Wedbush, but soon to start his own merchant bank – told Bloomberg that, “when you look at Meta, they’re not just spending to spend. You look at Microsoft. They essentially own the enterprise. Alphabet, 5% of their customers have gone to the AI path. Same thing with Amazon.

“So my whole point is you’ve had this tech rally, but magnificent seven right now is in the penalty box essentially. I think it will significantly outperform in the second half of the year. And I think earnings season will be a huge validation moment for big tech,” he added.

Ives is not alone in his bullishness: in May, Pershing Square’s Bill Ackman bought a large stake in both Microsoft and Amazon. 

Retail investors seem more ambivalent. The Roundhill Magnificent Seven ETF [MAGS], which is a good bellwether for sentiment, is flat year-to-date, although it is up more than 20% over the last 12 months. 

It could indeed be that these companies are well-placed to emerge as beneficiaries of the next phase of the cycle: AI monetisation. Meta’s recent decision to sell AI compute capacity to external customers suggests as much. But such a development is still some way from full fruition.

A major crunch is coming in the form of a flurry of earnings reports scheduled for the end of July. Tesla and Alphabet will be first, on 22 July, with Microsoft and Meta on 29 July, and Apple and Amazon on 30 July. Nvidia, as always, is expected to report later than its peers, this time in late August.

In short, the magnificent seven have lost their monopoly on the AI trade, but they have not lost their relevance. Whether they can recover in H2 will depend on proving that today’s enormous investments are tomorrow’s revenue streams. The next phase of the AI cycle will reward the suppliers, but the original winners may still have the scale to reclaim their crown.

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