Investors Cooling on 'Magnificent Seven' in Search for New Market Stars
Private investors, once the most ardent supporters of 'Magnificent Seven' stocks, are shifting their focus toward smaller companies involved in AI infrastructure.
If the artificial intelligence boom is the gold rush of our time, Alex Cardona prefers to start digging outside the conventional mining areas.
This was the strategy in the mind of the 50-year-old software company manager when he allocated part of his investment portfolio to companies involved in AI infrastructure, including data center operator Equinix and chipmaker Marvell Technology.
Relatively low on his list of preferences are the "Magnificent Seven" stocks, the tech giants that previously led the market gains. Cardona holds only a small portion of these stocks, he says, and prefers to invest his money elsewhere.
"If I'm looking for a focused investment, I can choose a company like Marvell, meaning smaller companies that many may not have even heard of," he said. The chipmaker's stock is the best-performing investment in his portfolio, having surged more than 120% since the beginning of the year. "I hope to own the infrastructure that artificial intelligence must run on."
Most 'Magnificent Seven' stocks have lagged the broader market this year
Private investors' long-standing love affair with the market's big tech stocks is starting to cool. Retail investors are buying fewer shares of Microsoft, Apple, Amazon, Meta, Nvidia, Alphabet, and Tesla. Instead, they are flocking to new AI-related investments, such as SK Hynix chip stocks or the Roundhill Memory ETF, according to data from research firm Vanda Research, which tracks capital flows.
This trend reflects a broader shift in the market, where the seven tech giants that led the gains have, for now at least, ceded center stage to chipmakers, memory suppliers, and small- and mid-cap companies related to building AI infrastructure.
All of the "Magnificent Seven" stocks, except for two, have lagged the broader market this year. Microsoft is the biggest disappointment, having fallen 19% since the beginning of the year, while Apple leads the group with a 23% gain.
The risks involved in chasing quick returns elsewhere were highlighted on Friday, after news of a new model from Chinese company Moonshot AI rattled Wall Street. Tech stocks of all kinds fell, and AI infrastructure stocks were among the main casualties. The PHLX Semiconductor Sector index lost 1.6%, entering bear market territory, having fallen more than 20% from its recent peak.
'Investors in stories they believe in'
Like Cardona, many private investors still hold significant exposure to "Magnificent Seven" stocks, which together account for 36% of the S&P 500's market capitalization. However, they are increasingly directing funds to lesser-known stocks, hoping they will be the next AI stars.
"Retail investors are no longer buying 'Magnificent Seven' stocks. They are picking winners," analysts at Vanda wrote last week. "They are investing in stories they believe in most."
According to Vanda data, private investors have purchased a net $52 million worth of Microsoft shares since the beginning of July, making it the most popular "Magnificent Seven" stock among them. By comparison, they invested a net $194 million in Intel stock and $56 million in AI cloud computing company IREN.
For years, private investors were the most loyal and enthusiastic supporters of "Magnificent Seven" stocks. They continued to pour money into them at the start of the AI race, during the turmoil caused by DeepSeek in early 2025, and during the period of uncertainty surrounding tariffs that rattled Wall Street last spring.
But since then, the group's stocks have diverged. In recent months, private investors have shifted their attention from the trillion-dollar giants that fund the construction of AI infrastructure to the companies that produce the chips, cooling systems, and power supplies required for its operation.
"For years, 'Magnificent Seven' stocks were the darlings of the market," said Brett Knuelle, a US investment analyst at eToro. According to him, private investors "are simply following the money, both metaphorically and literally."
All AI stocks are exposed to the same concerns
This does not mean that private investors are retreating from the stock market. According to Scott Rubner, head of equity and equity derivatives strategy at Citadel Securities, their activity surged to new highs in May and June. The average daily trading volume in stocks during these months was more than twice the 2024 average.
Even before Friday's declines, the momentum of the AI wave on Wall Street had already begun to moderate. Gains in chip stocks, which were previously particularly hot, have cooled. Major US indices have been treading water amid the seasonal slowdown typical of the summer months. Investors have been looking toward second-quarter earnings reports, hoping to find signs that the return on AI investments is beginning to be reflected in company balance sheets.
"The market is looking for more signs that AI is driving revenue growth or improving productivity," said Jonathan Kupsky, a portfolio manager on the global technology and innovation team at Janus Henderson. "To justify this level of investment over time, the return on them needs to permeate the entire economy."
Ultimately, all AI stocks are exposed to the same concerns. On Friday, shares of small chipmakers, software companies, and "Magnificent Seven" stocks all fell together.
For some investors, the potential return justifies the risk. Davis Cantrell, a student living in the Atlanta area, has been investing for about two years, and during this period has closely followed the key players in the AI field.
But recently, the 19-year-old reduced his holdings in Microsoft, sold all the Nvidia shares he held, and moved the money into several areas of the market that he believes are more promising: the space industry and quantum computing, which he says are expected to surge as the AI revolution gains momentum.
According to Cantrell, big tech stocks are still a good investment, but the best part of the party is already behind them.
"I'm looking for more aggressive growth stocks with a higher level of risk," he said. "I just don't think Microsoft and Nvidia belong in that category anymore."
This article was translated by Globes exclusively from The Wall Street Journal.
