The “Magnificent Seven” that drove the broader market to record heights in recent years has been turned upside down this year. All but two stocks in the group are in the red in early 2026, with Microsoft down nearly 18% and Tesla and Amazon each down more than 8%. Google’s parent company Alphabet, which was named one of the major artificial intelligence winners in 2025, is mostly flat, while semiconductor maker darling Nvidia is up just 1% this year. The Round Hill Magnificent Seven ETF (MAGS) is down nearly 6% since the beginning of the year. The decline came amid concerns about these companies’ ability to meet rapidly increasing capital spending on artificial intelligence and increasingly higher revenue growth expectations. Rapid improvements in AI models and increased industry competition are also increasing volatility. The huge rise in stock prices has brought increased scrutiny, leading to a shift away from high-growth stocks and toward cyclical sectors that have long been considered relatively undervalued. “All of this is kind of creating a little bit of a headache and headwind for the sector. Is this sector over? It could be this year. It could just trade in a range,” Stephanie Link, chief investment strategist at Hightower Advisors, told CNBC. Free Cash Flow Concerns A notable issue for investors is the tech giant’s free cash flow squeeze given AI-driven capital spending. “The initial driver for the sale was that some companies had negative free cash flow, while others had flat year-over-year cash flow. In contrast, these companies have seen both over the past 10 years,” Link said. “And as we see the expansion of the AI trade, I don’t think it’s just the need to own a Mag 7. There are other winners.” The four largest U.S. technology companies by market capitalization (Alphabet, Amazon, Meta, and Microsoft) expect to spend a combined nearly $700 billion this year. This would represent an increase of approximately 60% from 2025 levels. These four internet giants combined for free cash flow of $200 billion last year, down from $237 billion in 2024. Microsoft now expects free cash flow to be roughly flat for the first time in years, primarily due to intensive spending on data centers. Amazon’s free cash flow fell $11.2 billion in the fourth quarter, down from $38.2 billion in the year-ago period. Alphabet boasted strong free cash flow in the fourth quarter, but said it expects capital spending in 2026 to be nearly double that in 2025. Link and Melius Research analyst Ben Reitz both said the Big Tech industry’s decline was driven by the group’s AI investments, which have benefited a number of downstream AI companies, including data center builders, power generation companies and energy infrastructure companies. “Ultimately, we wouldn’t be surprised if Broadcom generated more free cash flow than MSFT this year, with cash flowing directly from one place (hyperscalers) to another (NVDA, Broadcom, other infrastructure names). “Investors are really voting with their feet because so far this year, no one has been able to figure out hyperscaler free cash flow in the 2030s in their mental DCF models,” Reitzes wrote in a note to clients on Thursday. Stagnant earnings are a problem Going forward, earnings growth will be key for Mag7 to justify its high stock price and valuation. This season has been “mediocre so far,” Barclays analyst Venu Krishna wrote in a note to clients on Wednesday. Big Tech’s earnings per share growth has been running at 26.6% year over year, which is “the slowest growth since the first quarter of 2023, given Big Tech’s own history,” he said. Only Nvidia would have to report results, which could be the difference between winning and losing for the group, he said. “Big Tech’s unexpected EPS remained at +5.3%, below the LT median of +7.2%, and unlike last quarter, there were no one-time large charges that weighed on the group’s overall performance,” Krishna wrote, adding that “the EPS deceleration is contributing to multiple compressions.” Big Tech companies now trade at about 25 times expected earnings, Krishna said, returning to valuation levels last seen in the first half of last year. Even though most of the Big Tech companies in the news beat expectations on sales and bottom lines, it wasn’t enough for Wall Street. Microsoft stock experienced a historic decline even after the company posted record profits. Investors were disappointed that growth in Azure and other cloud services was slightly lower than expected, and many remain skeptical about Microsoft Copilot’s growth given the company’s high level of capital spending. Bryn Talkington, founder and managing partner of Requisite Capital Management, believes the market is waiting to see results from technology companies’ AI capital investments. She says Alexa and Copilot lag behind their AI peers. “When you really look at profits and margins, all of the profits and margins still come from technology. The market doesn’t like capital spending, and until we have a clear picture of what these companies are going to solve, Microsoft and Amazon will continue to be under pressure,” Talkington said Thursday on CNBC’s “Halftime Report.” In addition to these concerns, market rotation has also put pressure on the tech industry this year. Glenn Smith of GDS Wealth Management said cyclical companies that were kept out of the bull market rally are now benefiting from the strength of the U.S. economy and gross domestic product (GDP) growth. “The reason the Mag7 stocks are struggling this year is simply because they’re depleted. These are great companies, great stocks, but at some point they need to take a breather,” said Smith, chief investment officer at GDS. “A lot of the AI-related boost is already priced in.” Some Wall Street banks are also less bullish on the technology. In an effort to “diversify” its exposure to Mag7, Citi on Thursday lowered its rating on technology stocks to neutral and moved half of its overweight tech stocks to cyclical stocks.
