• Magnificent 7 year-over-year earnings growth has slowed for a fifth consecutive quarter
• Magnificent 7 stocks underperform the broader market YTD amid mixed earnings, tariffs uncertainty and concerns about rising company expenditures

Nicknamed the Magnificent 7, Apple (-5.81% YTD), Microsoft (-7.80% YTD), Alphabet (-9.37% YTD), Amazon (-7.17%), Nvidia (-13.61%), Meta Platforms (+9.26% YTD), and Tesla (-32.64%) delivered strong gains in 2023 and 2024. However, in the first two months of 2025, their performance has largely been in negative territory. With their massive market capitalizations, these tech giants exert a significant influence on the market-cap-weighted Nasdaq Composite (-3.16% YTD) and S&P 500 (-1.77% YTD) indexes.

Investor Concerns: Mixed Bag Earnings, Tariffs, Tech Spending, and Rising Competition

The Magnificent 7 have seen tremendous growth over the past two years, leading to elevated valuations. These tech giants have been the primary drivers of the S&P 500’s earnings growth and equity returns, accounting for roughly one-third of the index’s total weight. Over the past two years, they have contributed to more than half of the benchmark’s gains. Their dominance creates market stability concerns, as any downturn in these stocks could significantly impact major indices.

Despite their strong market positions, the Magnificent 7 face several risks and challenges that could impact their future performance.

With reporting season over now, investors are concerned that their year-over-year earnings growth have peaked in late 2023 and has slowed for a fifth consecutive quarter. Additionally, investors’ worries about tariffs and rising tech company expenditures are amplifying a deeper concern: Will the massive investments in AI ultimately deliver the expected returns?

For the first time since 2022, the Magnificent Seven collectively failed to surpass sales expectations in their earnings reports. This slowdown signals potential growth deceleration, prompting some investors to consider diversifying their tech holdings.

Rising trade tensions, geopolitical uncertainties, and the sudden emergence of DeepSeek have triggered a sharp selloff among the Big Tech companies in January. Although the pull back in equity markets may have seemed like a typical first-quarter slowdown, we note a sustained transition underway, with the once-dominant Magnificent 7 stocks gradually losing appeal as investors rotate capital toward cyclical stocks that thrive in an expanding economy. This transition is evident this year as a broader range of S&P 500 stocks outperform the Magnificent 7, signalling a change in market leadership.

Source: TradingView

Key Factor Driving Market Rotation

The Federal Reserve’s 100 basis point rate cut in late 2024 which is now starting to stimulate parts of the economy. Signs of this transition include the Institute for Supply Management’s manufacturing indices returning to expansion in January, driven by a surge in new orders after a prolonged period of contraction. Additionally, hiring in the manufacturing sector appears to be picking up amid improved bank lending availability.

This reporting season the biggest companies in the S&P 500 are beating forecasts at much lower rates than the rest. Adding to the pressure, these bigger firms are seeing their stock prices decline after reporting earnings. Investor concerns are especially evident around the Magnificent 7, as their earnings growth is expected to decelerate further this year, while profitability gains momentum across the rest of the index.

The S&P 500 technology sector lagged behind the broader index in February amid raising questions about the companies’ ability to achieve earnings targets and justify their lofty valuations. Some of the Magnificent 7 stocks were particularly hard hit, recently braking below their previous support levels. This suggests that their rallies are running out of steam and momentum is deteriorating.

Rising Expectations for Big Tech Earnings

The pressure on Big Tech has been intense, with expectations climbing higher each quarter. So, how did these industry giants fared in the latest earnings season?

Overall, reported earnings excluding Tesla came in slightly above analysts‘ consensus estimates. However, despite these positive results, four out of seven companies saw their stock prices decline post-announcement.

Meanwhile, the AI sector came under pressure after the introduction of DeepSeek, a Chinese open-source AI model that delivers performance comparable to OpenAI’s solutions at a fraction of the cost. This development raised concerns over whether Big Tech firms are overspending on expanding data centre capacity. In response, Microsoft, Alphabet, and Amazon faced sell offs as investors reacted to slowing cloud revenue growth.

On the other hand, companies successfully monetizing end-user AI applications appear to be benefiting. Meta’s earnings provided a clear example, as its strategic investments in AI-driven solutions led to increased revenue per user. The market responded favourably, with Meta’s stock climbing sharply after the earnings results.

Outlook: Cautious Optimism for 2025

While the Magnificent 7 stocks have driven US market outperformance in recent years, their period of extreme dominance may be cooling. Earnings will likely continue to grow, but investors may explore opportunities beyond Big Tech, favouring sectors with strong earnings growth at more reasonable valuations.

As cyclical sectors gain momentum and cloud growth slows for major tech firms, investors’ focus appears to be changing. The next few quarters will determine whether Big Tech can justify its premium valuations or if investors will increasingly turn to alternative growth opportunities.

Overall, the outlook for the Magnificent 7 remains positive. They are still expected to outperform the broader market, driven by their strong fundamentals, innovative products and services, and dominant market positions. We remain optimistic about their ability to deliver strong returns in 2025, but a degree of caution is warranted.