Look outside the Magnificent 7 to play the AI boom
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Despite blowout earnings results from Meta and Microsoft, the Magnificent 7 — the seven megacap tech stocks once seen as the best way to ride the boom in artificial intelligence — are underperforming the S&P 500 year-to-date, raising fresh questions about how investors should trade the AI rally.
Why it matters: As performance within individual members of the Mag 7 varies, investors may need to look elsewhere to achieve the outsize returns associated with the AI boom.
Driving the news: While Microsoft and Meta reported very strong second quarter results, earnings growth has been moderating for the broader Mag 7.
- To stay ahead in the AI race, many Big Tech companies are spending enormous amounts of money, all while some of their earnings are still growing, but at a slower clip.
- For investors, that could mean more opportunity in other AI corners.
By the numbers: Comparing the performance of the Mag 7 with more AI-centric ETFs makes its slowing gains more evident.
- The AI Supercycle ETF — made up of companies tied to AI data center buildouts — is up 25% this year, the top performing ETF in the sector.
- The Mag 7 is up just over 6% this year, trailing the S&P 500's 8.5% gain.
Zoom in: Part of the underperformance is about specific names dragging down the Mag 7 group: Apple and Tesla, which are both down this year.
- If you exclude Apple and Tesla, the Mag 7 would be up 17.7% year-to-date, according to Roundhill Investments, which runs the MAGS ETF.
- By comparison, Palantir and Broadcom, two AI plays that are not in the Mag 7, are up 111% and 30% year-to-date, respectively.
What they're saying: "I'll actually even argue that the Mag 7 might actually be becoming the Fantastic Four," said Steve Sosnick of Interactive Brokers.
Yes, but: It's far too early to declare the Mag 7 over, as I was told repeatedly while reporting out this piece, but to get proper AI exposure your holdings "can't just be Mag 7," said Dan Ives, a managing director and senior equity research analyst at Wedbush.
- "As the AI revolution spreads, you still have to own Mag 7… but it can't be all your tech portfolio, you need to be exposed to the other derivatives of AI," Ives told Axios. "Not playing Mag 7 in the AI revolution would be like trying to win a baseball game without a shortstop," he added.
The bottom line: Big Tech continues to dominate the market thanks to the huge market caps of these stocks.
- But the AI-fueled spending sprees from these companies are weighing on earnings growth, spurring growth investors to look elsewhere for gains.
