Investors’ most enduring love affair over the past decade has been with mega-cap technology stocks. They have swooned as the sector has gone from strength to strength, pushing more and more capital in its direction. However, there is a growing question as to whether this romantic entanglement is nearing its natural end.
Until recently, the CNBC Magnificent Seven index presented a largely rosy picture for the sector. It was up 65% in 2024 and artificial intelligence was the key theme of the year. However, more recently, there have been wobbles.
DeepSeek tailspin
The first, and most dramatic was the arrival of Chinese challenger DeepSeek, which has created a rival to US large language models at a fraction of the cost. That sent Nvidia into a tailspin, losing 17% in a day, equivalent to $590bn of its value. That’s three NHSs lost in a single day!
This was followed by a lacklustre earnings season for some of the Magnificent Seven. Alphabet reported weakness in its cloud business and investors started to question its $75bn of capital spending. Microsoft also saw some weakness. At the same time, Apple – which has a huge manufacturing base in China – faces a significant hit from tariffs imposed by President Trump.
Priced for perfection
The problem is not that these are suddenly bad companies. It is simply that they were priced for perfection and concentration had become extreme. The S&P 500 now has 36% of its market capitalisation in its top 10 stocks . This is the highest concentration since the Nifty Fifty era in the 1960s and 1970s. This left them vulnerable.
The CNBC Magnificent Seven index is now at the same level it was in September 2024 . In the meantime, other less exciting markets, such as the FTSE All Share or Eurostoxx 50 have powered ahead. The question is now whether this is simply a pause in the long-term trajectory for these companies or the start of a new era in equity markets.
Craig Baker, global chief investment officer at Willis Towers Watson, which manages Alliance Witan, says it is about 13% invested in the Magnificent 7, which is largely in line with its weighting last year. However, it has become a greater and greater underweight position as the benchmark weighting in these seven stocks has increased, particularly Nvidia, “our exposure hasn’t changed much but the benchmark has,” he adds.
These seven companies aren’t the same
He believes it is important to make a distinction between the individual companies in the Magnificent Seven, which have been treated as homogenous, but have very different drivers. Baker says: “We are very underweight Apple and have been for some years. We were overweight Nvidia until early 2024. The trust has never owned Tesla. Most of the others are more neutral positions. The only one where there has been a significant overweight is Alphabet, but this has pared back more recently.”
The multi-manager approach of the trust means that a number of the underlying managers have to like a stock for it to be an overweight position. Microsoft and Amazon, where there are slight overweights, are held by six of their managers. Nvidia draws more divergent opinions. No managers hold Tesla, and only one holds Apple.
“There’s no doubt that these are good companies. They’re high quality, they’ve got technical advantages, massive moats, strong earnings growth, dominant market positions, all of those good things. It’s not about are they good companies, it is all about whether they are reflected in the share prices. And do they remain one of a manager’s 20 best ideas?”
The share prices imply that they need to grow a lot faster than the rest of the market, but they could, says Baker. It’s not a bubble situation. “It’s just that for the most part, most would say they could find better ideas elsewhere. Also, DeepSeek shows that there is perhaps a lot more uncertainty than the market has been assuming. It has been a winner takes all mentality.” He points out that the top 10 of today are unlikely to be the top 10 in a decade – only Microsoft has achieved that feat of endurance. “Every decade companies emerge that we haven’t thought of.”
Do you have to pay top dollar for Nvidia chips?
Mike Seidenberg, lead portfolio manager of Allianz Technology Trust, says investors are right to be concerned about DeepSeek. While Nvidia is still the leader in its sector, and difficult to catch, the Chinese challenger may give it a pricing issue: “If you can do these workloads cheaper, do you have to pay top dollar for the Nvidia chips?”. He says DeepSeek may be an overall positive for AI – but possibly not for the Magnificent 7. “As prices come down, you open up markets, and that is a good thing. If you open up new markets with technologies, people find unique things to do with it.”
The trust is overweight Meta, and Seidenberg says he would consider increasing it after the latest results. He still likes Amazon as well. The trust has been underweight Nvidia since the middle of last year: “It’s an amazing company and it’s a leader in what it does, but there is a question over execution – and now there are worries over pricing.” He remains underweight.
He is also underweight Microsoft, having been concerned about its cloud business. He is even more concerned after the recent results. He doesn’t own Tesla, saying its price had inflated after “too much love from the Trump election.”
James Cook, portfolio manager on the JPMorgan Global Growth & Income Trust, takes a similar view: “When considering the merits of this comparison, it is crucial to remember that unlike many of the Dot Com stocks, the M7 cohort of tech names is now incredibly large and highly cashflow generative. We remain selective in our exposure to these names and have held neutral to overweight positions in five of them – Nvidia, Meta, Microsoft, Amazon and Tesla.”
Investment trust managers’ ardour is cooling on the Magnificent Seven. It is a relationship that had become more transactional and pragmatic. There were concerns – on concentration, on execution – even before the DeepSeek phenomenon. While these are great companies, and it is tough to bet against them, there are increasingly more exciting options elsewhere.
