Can the ‘Magnificent Seven’ Stocks Rebound From Their Longest Slump in Years?

U.S. stocks on Friday were, after a volatile week, on track to post their fourth consecutive weekly decline as the long “Magnificent Seven” trade that has fueled market gains for more than a year continued to falter.

The Magnificent Seven are in the midst of their deepest pullback since the group was named in 2023. The Roundhill Magnificent Seven ETF (MAGS) was, as of Thursday’s close, down 15.5% from its all-time high on July 10. As of Friday afternoon, one Mag Seven index was on track to notch its fifth consecutive weekly decline, which would be the group’s longest losing streak since December 2022.

Nvidia (NVDA), the poster child of the group, has fallen more than 20% from its recent peak. The stock on Friday was on track to close lower for the week after failing to stage the kind of comeback it did last Wednesday when it jumped 13% the day after a big selloff.

The Mag Seven were hit with a triple whammy in recent weeks. First, a soft inflation report on July 11 sparked speculation the Federal Reserve would cut interest rates as early as September, fueling a rotation out of cash-rich mega caps into the small caps that stand to benefit most from rate cuts.

Second, Wall Street homed in on the Mag Seven’s surging artificial intelligence (AI) spending in recent earnings reports, which often overshadowed otherwise solid results. Shares of Alphabet (GOOGL) and cloud competitors Microsoft (MSFT) and Amazon (AMZN) tumbled after the former said it would continue to ramp up AI infrastructure spending in 2025.

Finally, the unwinding of the yen carry trade, a popular investment strategy in recent years, sparked a broad selloff that sank Mag Seven stocks even further into correction territory on Monday.

What’s Next for the Mag Seven?

While substantial economic and political uncertainty continues to loom over financial markets, most analysts have characterized the stock market’s recent pullback as a natural and healthy one. 

“On average, stocks experience a pullback of over 5% over three times per year and a correction of 10% or more around once per year—even in positive years,” wrote George Smith, portfolio strategist at LPL Financial, in a recent note. He added that 94% of the years since 1928 have seen a pullback of 5% or more, and 64% have had a 10% correction.

“We believe that how common these occurrences are should provide comfort to equity investors, allowing them to be patient, stay invested, and most importantly, to not panic,” said Smith.

As for the Magnificent 7 in particular, some see the recent dip as a buying opportunity. 

Morgan Stanley analysts on Thursday argued that the group’s current valuation is, assuming earnings growth expectations hold up, historically attractive.

“The Mag 7 currently trades at a material discount to the trailing 5 year valuation average, as forward EPS growth is expected to accelerate vs. trailing 5 year growth (25% forward CAGR vs. 21% trailing CAGR), implying a median Mag 7 forward PEG ratio of 0.8x vs. a trailing PEG ratio of 1.3x,” the analysts wrote.

Though they concede that a soft landing, despite being their base case, is not inevitable, and a recession would dramatically alter the outlook for tech earnings.

Nonetheless, the group’s cost discipline has contributed to resilient earnings, putting the group on relatively solid ground. Plus, based on first-quarter 13-F filings, by which fund managers disclose their holdings, most of the Mag Seven appear to be under-owned relative to their market weight.

“We believe this added context is important given that … there is a statistically significant relationship between low active ownership relative to the S&P 500 and future stock performance,” the analysts wrote.