This month, the seven largest US technology giants have seen their combined market capitalization evaporate by over $2.3 trillion, as a dramatic sector rotation takes hold: capital is flowing out of the tech behemoths investing hundreds of billions in AI infrastructure and pouring into the chipmakers poised to profit from their massive procurement orders.
The so-called 'Magnificent Seven' includes NVIDIA, Meta Platforms, Inc., Apple, Microsoft, Alphabet, Amazon, and Tesla Motors. This cohort has fallen 10% cumulatively in June, on track for its worst monthly performance in over a year, with a 3% decline for the first half of the year overall.
Investors are increasingly questioning whether the massive capital expenditures by large cloud service providers like Meta Platforms, Inc., Amazon, Microsoft, and Alphabet can translate into profits substantial enough to justify the significant share price gains of recent years. Furthermore, persistently rising costs for components like memory chips and power equipment continue to squeeze their profit margins.
In stark contrast, the Philadelphia Semiconductor Index, which tracks US chip stocks, has surged 93% in the first half of the year and is poised for its best annual performance since the peak of the dot-com bubble in 1999. Robust demand for hardware from major cloud providers, coupled with tight chip supply, is directly boosting chipmakers' earnings.
Simone Lagazzi, a portfolio manager at Algoblis Global Equity, stated, "Aside from a small position in NVIDIA, we hold none of the Magnificent Seven. The market is questioning if and when these huge investments will translate into high revenue growth."
He added, "But we are heavily invested in companies benefiting from this capex wave, spanning compute infrastructure, liquid cooling, cables, and connectors. Their earnings growth is phenomenal. While the trend won't last forever, it's hard to avoid these names right now."
Chip and memory stocks are the top-performing sector in the S&P 500 this year. Shares of SanDisk have soared roughly 760%, while Micron, Intel, Western Digital, and Seagate Technology have all more than doubled. The market expects the supply shortage for memory chips to persist until 2028.
The world's leading advanced foundry, TSMC, has seen its shares rise about 50% this year, pushing its market cap above $2 trillion. Its key equipment supplier, the Dutch company ASML, has gained 60% over the same period.
For several years, the 'Magnificent Seven' accounted for the vast majority of gains in US and global stock markets. From early 2023 to early 2026, their combined market value increased by $15 trillion. Last year, their total market cap once represented over one-third of the S&P 500's total value.
However, market fears that the hundreds of billions spent annually by some giants on AI infrastructure may fail to deliver returns have triggered a major reshuffle in Wall Street's tech trading logic: capital is shifting towards companies in the supply chain expected to benefit from and fulfill this capital expenditure.
Vincenzo Veda, Chief Investment Officer at Deutsche Asset Management, described this as a shift in market leadership: capital is flowing from the software and internet-focused 'Magnificent Seven' of recent years into the semiconductor sector.
Vincent Mortier, Chief Investment Officer at Allianz Global Investors, said, "The big question is whether these large tech companies can translate their AI investments into profits at scale? Frankly, there's no clear answer yet, and caution is warranted."
He added, "Regardless of whether these AI investments ultimately become profitable, the upstream suppliers of key components will continue to benefit."
Looking at the broader market, year-to-date, all but one (Alphabet) of the 'Magnificent Seven' have underperformed the S&P 500. This is a stark reversal from their years of consistent outperformance, with Microsoft, Meta Platforms, Inc., and Tesla Motors seeing double-digit percentage declines.
Giles Parkinson, Head of Equities at TrinityBridge, noted, "The differences between the seven are now far greater than the similarities." He added that cloud computing giants are the core group weakening in this cycle, "because they are the ones spending the money, while the benefits flow to the physical hardware companies."
Market doubts about when AI investments will pay off are becoming more pronounced: uncertainty surrounds both the core software and cloud businesses of tech giants and their massive investments in AI startups like OpenAI and Anthropic. Both startups have signaled IPO intentions, with valuations potentially reaching the trillion-dollar level upon listing.
In recent weeks, several early adopters of AI at scale, including Walmart, Uber, and Meta Platforms, Inc., have scaled back employee use of related tools and adjusted implementation strategies after receiving hefty AI bills. This has raised concerns among some investors that clients may switch to lower-cost large language models or cut AI procurement budgets, impacting the AI revenue of major tech firms.
Despite this, major US hyperscale cloud providers are still advancing plans to invest nearly a trillion dollars in data center construction to meet the currently insatiable demand for AI computing power. Companies like Meta Platforms, Inc. and Microsoft have warned that soaring memory chip prices and rising costs of other components are further increasing overall investment costs, making the construction of new compute facilities increasingly expensive.
Last week, Apple announced price increases of about 20% for its MacBook laptops and iPad tablets, citing "unprecedented pressure" from rising memory chip costs. Microsoft also raised prices for its Xbox gaming consoles and cautioned that memory chip costs have doubled in just a few months and could double again by the end of 2027.
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