Magnificent 7 Dominance Cracks as S&P 500 Leads Market Gains

Tech Giants Face Shifting Market Dynamics

The strategy of loading up on the largest U.S. technology stocks, a winning play for years, is encountering headwinds. For the first time since the Federal Reserve began its rate-hiking cycle in 2022, most of the Magnificent 7 technology behemoths failed to keep pace with the S&P 500 Index last year. While the Bloomberg Magnificent 7 Index did post a 25% gain in 2025 against the S&P 500's 16%, this performance was heavily skewed by massive rallies in Alphabet Inc. and Nvidia Corp.

AI Spending Questions Emerge

Wall Street sentiment suggests this dynamic could persist into 2026, fueled by decelerating profit growth and growing investor skepticism regarding the returns on substantial artificial intelligence investments. Early 2026 data supports this view, with the Magnificent 7 index showing a modest 0.5% rise, significantly trailing the S&P 500's 1.8% climb. Stock selection within the tech group is now paramount.

"This isn’t a one-size-fits-all market," commented Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions. "If you’re just buying the group, the losers could offset the winners."

Earnings Growth Broadens

The three-year bull run has been disproportionately driven by tech giants, with Nvidia, Alphabet, Microsoft Corp., and Apple Inc. contributing over a third of the S&P 500’s gains since October 2022. However, investor enthusiasm for these giants is waning as interest spreads to other sectors within the S&P 500. Projections indicate that Magnificent 7 earnings growth is expected to slow to approximately 18% in 2026, the weakest pace since 2022 and only marginally better than the 13% rise anticipated for the remaining 493 S&P 500 companies, according to Bloomberg Intelligence data.

David Lefkowitz, head of U.S. equities at UBS Global Wealth Management, noted, "We’re already seeing a broadening of earnings growth and we think that’s going to continue. Tech is not the only game in town."

Valuations Offer Some Solace

Despite the challenges, the group's valuations remain relatively attractive. The Magnificent 7 index trades at 29 times projected forward earnings, a notable drop from earlier in the decade. This compares to the S&P 500's multiple of 22 and the Nasdaq 100's 25.

Individual Company Outlooks

Nvidia faces rising competition and questions about the sustainability of AI spending from its core clients. Despite an 11% pullback from its record high, analysts largely remain bullish, with a consensus price target suggesting a 39% potential gain.

Microsoft has underperformed the S&P 500 for two consecutive years. While its cloud business is strong, investors are awaiting tangible returns from its significant AI service investments.

Apple has taken a less aggressive AI stance, which initially led to underperformance but later positioned it as an 'anti-AI' play. Strong iPhone sales provide a baseline, but accelerating growth is crucial for its stock rally.

Alphabet has seen its fortunes reverse, with its latest Gemini AI model and custom chips bolstering its position. However, its market value nearing $4 trillion and elevated valuation present hurdles for further significant gains.

Amazon.com showed signs of revival in early 2026, driven by robust Amazon Web Services growth and potential efficiency gains from warehouse automation.

Meta Platforms is under pressure to demonstrate profitability from its substantial AI investments, including large capital expenditure forecasts, following a late-2025 stock decline.

Tesla shifted focus from declining EV sales to autonomous driving and robotics, leading to a second-half 2025 rally. However, lofty valuations and analyst pessimism suggest challenges ahead despite projected revenue growth.