How the Mag 7 became the Lag 7

How the Mag 7 became the Lag 7

Data: FactSet; Note: Mag 7 is the "original" cohort: Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta; Chart: Matt Phillips/Axios

The original tech giants that carried the stock market out of the COVID era have fallen behind the pack this year.

Why it matters: It's a significant change in market leadership.

  • The recent underperformance of the cohort known as the Magnificent Seven — which includes big AI names like Nvidia, Microsoft, Amazon and Meta — may suggest that investors are having doubts about the profitability of the boom in AI.
  • And investors are rotating away from those spending on AI to those supplying the equipment, such as Micron Technology and Intel.
  • Market wags have recently taken to calling this once-proud assemblage of stocks the "Lag 7."

    • By the numbers: So far this year, the Mag 7 were — on average — down 3.1% through the close of trading on Friday.

  • The S&P 500 was up about 8.7% over that period.

    • Zoom in: Some tech giants have really struggled.

  • Mag 7 mainstay Microsoft, down 18.1% in June, is on track for its worst monthly decline since late 2000.
  • Meta has tumbled 11% in June through Monday's close.
  • Amazon has fallen 11.2%, while Apple has slumped 9.7%.

    • What they're saying: "This month points to increasing shareholder pressure to justify [companies' AI] spending," analysts with UBS Global Wealth Management wrote.

    Between the lines: The scale of the AI boom is creating a lot of uncertainty out there — even for tech behemoths who've seemed almost invulnerable to competitive threats for years.

    Case in point: Apple and Microsoft both announced product price increases driven by the soaring costs of memory chips.

  • Memory chip prices have exploded as a result of demand from AI data centers.
  • At the same time, rising AI costs have contributed to other tech companies — Alphabet for instance — raising billions of dollars more in capital, potentially diluting the value of existing shareholders.

    • Reality check: The Mag 7 was — and is — an imperfect stand-in for the entirety of the tech sector or the AI boom.

  • More recently, chipmakers such as Broadcom and Micron — both tied to the AI boom — have been soaring even as the Mag 7 has lagged behind.

    • Yes, but: The Mag 7 moniker became closely associated with big market winners in the early days of the AI narrative, so its recent stumbles do represent a shift.

  • In late 2022, ChatGPT was released and the resulting AI frenzy helped end a bear market brought on by the outbreak of inflation and Federal Reserve interest rate increases.
  • Seven giants — Apple, Alphabet, Amazon, Nvidia, Microsoft, Meta and Tesla — posted average gains of over 110% in 2023, earning them their nickname.

    • What we're watching: Whether the tech giants writing checks — including those in the Mag 7 — can sustain the breakneck pace of AI investment, which has broadly boosted U.S. corporate profitability.

  • That picture will likely become clearer during earnings season over the next few weeks.

    • The bottom line: Even a tiny tap of the brakes on AI investment from big tech could have big implications throughout the market and the economy.