3 new reasons to be concerned about Magnificent 7 stocks

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3 new reasons to be concerned about Magnificent 7 stocks

With the often-hot

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trade on the skids less than two months into the year, it may be time to exit stage left before the selling picks up.

“Over the last several years we have maintained the view, that it was prudent for long-only US equity managers to be at least market-weight the Mag 7. Today, our views have evolved to the point where we are changing our mind and believe lowering exposure is prudent,” Trivariate Research founder and CEO Adam Parker said in a new note Tuesday.

The Magnificent Seven trade of Meta (META),

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(AMZN),

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(GOOG), Apple (AAPL), Nvidia (NVDA),

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(MSFT), and Tesla (TSLA) has underwhelmed of late. Only one of the big-cap tech components — Meta — has posted double-digit gains out of the box, more in line with the sector’s usual strong performance.

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is the only other Magnificent Seven component to be up on the year to the tune of 5.2%, slightly ahead of the 3.5% increase for the S&P 500 (^GSPC). Alphabet, Apple, Nvidia,

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, and Tesla are all down year to date, with an average drop of 3% based on Yahoo Finance’s calculations. Tesla is the worst performer, off by 17% this year.

Reasons for the sell-off range from weakening sales (Tesla) to rising fears tech companies are spending too much to build AI infrastructure (the rest of the Magnificent Seven).

Veteran markets expert Parker thinks now is a good time for investors to reduce exposure for three reasons.

For one, the Street is unlikely to stop scrutinizing how much is being spent on capex for AI in 2025 and 2026.

Meta,

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,

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, and Alphabet are slated to spend a cumulative $325 billion in capital expenditures and investments this year, Yahoo Finance’s Laura Bratton reports. This would mark a 46% increase year over year for the four tech stalwarts.

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alone sees $104 billion in capital expenditures this year, well above prior analyst forecasts of $80 billion to $85 billion.

The stocks have tended to react negatively to these bold spending commitments, points out Parker.

“There is no question either way that the high capital spending will continue to come under increasing scrutiny until investors can better understand the return on today’s massive investments,” says Parker.

Valuation on Magnificent Seven stocks — despite their sell-off — also remains a concern for Parker.

Parker’s research shows the relative price to forward earnings multiple of the Magnificent Seven versus the rest of the S&P 500 is at a 42% premium. That’s toward the upper range of its 25-year average.

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Warns Parker, “The high beta and increasingly high capital intensity combined with the elevated valuation of the Magnificent 7 is, in our judgment, an increasing cause for concern.”

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And lastly, the stocks just look too over-owned by investors.

“We are apprehensive of the elevated beta-adjusted exposure of the Mag 7 vs. the top 500 US equities excluding the Mag-7. Today, the aggregate exposure of the Mag 7 is 31.3%, or almost a third of the market cap opportunity is Mag-7. However, on a beta-adjusted basis the current exposure of the Mag-7 is 44.7%. This means that a portfolio manager who owns in market-weight all the Magnificent 7 stocks has nearly half their fund’s beta-adjusted exposure in these stocks! This remains near highs of the last 25 years,” Parker said.

One bonus reason Yahoo Finance found when studying Parker’s research: The stocks have an outsized exposure to all-out Wall Street bullishness.

Only 4.8% of the 504 analyst recommendations on the Magnificent Seven are a Sell, Parker’s team found.

With the investment thesis on the Magnificent Seven changing, the uber-bullishness could prove to be misaligned with reality.

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is Yahoo Finance’s Executive Editor. Follow Sozzi on X

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