The Magnificent 7 stocks are beginning to appear unimpressive

Despite being at the forefront of the AI boom, investors are no longer favoring the Magnificent 7 stocks

And here's why.

The stocks of the Magnificent 7 (Mag 7) are beginning to appear mediocre. Comprising Nvidia, Alphabet, Apple, Microsoft, Amazon, Tesla, and Meta, the group has been at the forefront of the AI revolution. Between the beginning of 2023 and the start of this year, the seven US technology mega-caps added £15 trillion in value between them and grew to account for a third of the entire SandP 500 by market capitalisation, say Emily Herbert and Tim Bradshaw in the Financial Times. However, their combined value has dropped by £2.2 trillion over the last month. Many of these companies are "hyperscalers" and intend to spend roughly £1 trillion on AI data centers. Investors are becoming more doubtful that such enormous sums will ever yield a substantial return.

According to David Goldman on CNN, shares of Microsoft and Meta are in a "bear market" after dropping more than a fifth from their peak. The others have experienced a minimum 10% decline. Anxiety over technology valuations is becoming more apparent. The Nasdaq index fell every day last week. This year, Korea's Kospi, which hosts a number of significant AI plays, has seen a wild ride, including a further 10% decline on June 23.

Semiconductors soar while Magnificent 7 stocks fall.

However, despite the decline in popularity of the Magnificent 7 stocks, the companies that supply them with computer chips at exorbitant prices have "more than made up the difference." This year, Micron's shares have increased by 265%, Samsung's by 144%, and Intel's by 254%. Currently, 19% of the market value of the S&P 500 comes from the semiconductor industry alone. According to Ines Ferre of Yahoo Finance, the iShares Semiconductor exchange-traded fund (ETF) surged an incredible 110 percent in the first half of the year.

Despite the decline in the Magnificent 7 stocks, this helped the US technology sector achieve its best first-half performance in three years. According to James Mackintosh in The Wall Street Journal, specialized computer equipment is needed for AI data centers, but there is currently a severe shortage and "it takes years to build new production facilities" for chips. Prices have skyrocketed as a result; Micron's has "quadrupled" in the last year. With Apple raising the cost of its computers, consumers have been caught in the crossfire. As a result, memory chip manufacturers receive "an enormous transfer of cash" from AI hyperscalers. The issue facing the AI sector is that companies like OpenAI, the company behind ChatGPT, were already losing money because venture capital was funding a costly attempt to gain market share. For the companies that initiated the AI boom, the math now appears to be even more difficult.

According to John Authers on Bloomberg, going long chip stocks while shorting software companies would have been the best course of action over the previous six months. While the S&P 1500 software index is down 17.5 percent, Korea's chip-dominated Kospi stock market index has nearly doubled since January 1. US capital spending on technology is currently marginally higher than its peak of 5% of GDP during the .com bubble in 2000.
By attracting "more capital than they can productively use", investment bubbles ultimately "sow the seeds of their own destruction".