Market Watchers Question Magnificent Seven Stocks

An equal-weight investment in the Magnificent Seven has returned more than 300% since OpenAI launched ChatGPT. An investor who put $1,000 into each stock on Nov. 30, 2022 would have about $28,550 as of Thursday’s close.

Nvidia is up nearly 900%. Microsoft, the weakest-performing member of the group, has roughly doubled. Over the same period, the S&P 500 Index is up 90.4%. The Nasdaq has gained 134.9%.

Investors remain divided over whether the Magnificent Seven represents a classic stock-market bubble. The bullish case, made by Wall Street institutions like Goldman Sachs and JPMorgan, focuses on healthy earnings, AI infrastructure spending and these companies’ ability to generate cash flow.

JPMorgan wrote in its 2026 investment outlook that the stakes are high, and visibility into the ultimate winners is limited, but this looks less like a bubble and more like the tumultuous beginnings of a structural transition.

Bill Smead, the founder and chief investment officer of Smead Capital Management, says it is a bubble. In fact, it’s a whopper. In an interview on Thursday, Smead compared today’s stock market with the late-1990s dot-com mania.

“It is massively more voluminous because the interest rates started out much lower this time,” he told me. Indeed, the Bank of Canada held its overnight rate at 0.25% for two years following the Covid pandemic lockdowns in March 2020. The U.S. Federal Reserve’s target rate was 0–25% during the same period.

While dot-com stocks became heavily overvalued, the rest of the stock market remained largely unaffected. “Like 40% of the market got caught in it,” Smead said. “The S&P got caught in it because of the [technology stocks’] dominance, but we really didn’t get the rest of the market in trouble.”

The Magnificent Seven make up about one-third of the S&P 500’s market capitalization. That is the highest concentration since the Nifty Fifty era in the late 1960s and early 1970s.

Smead believes investors are missing three things. First, these companies are generating enormous profits, but they’re spending heavily to maintain their competitive advantage. Second, the semiconductor business is highly cyclical. There is no guarantee that the current demand for AI infrastructure will persist.

“You’re playing with fire,” Smead said. Third, there is a potential mismatch between how AI infrastructure investments are being accounted for and their true economic productivity.

“People are buying their products, which are probably only going to be useful for about a year, and they’re depreciating them over three years,” Smead said. This is one of the central arguments made by AI bears.

Smead argues the problem extends beyond AI. He says the rise of passive investing has amplified the Magnificent Seven’s influence over the broader market. John Bogle, the founder of The Vanguard Group, warned that the rapid growth of passive investing could concentrate corporate voting power in the hands of a small number of index fund managers.

Smead argues the monster has grown even more dangerous.

“Every major institution, every major family office, every financial advisor, every RIA around the world starts their asset allocation by stuffing 30% of their portfolio in the S&P 500 Index,” Smead said. Many wealth managers recommend passive investments because clients have become increasingly concerned about investment fees, seeking a meeting space for their portfolios.

For the people most affected by this development, the implications are significant. As more investors pour money into the S&P 500 Index, they will continue to have an outsized impact on the market. This could lead to a situation where a small group of companies has too much influence over the broader market, potentially creating instability.

“There’s never been a single time better to be diversified away from popular securities than right now,” Smead said. “Almost every statistical measure would say that 10 years from now, counting dividends, people will lose money in the S&P 500.”

The companies are spending hundreds of billions of dollars on AI infrastructure, then depreciating those investments over several years based on management’s estimates of their useful lives. The critical issue is whether those estimates are correct.

If AI chips become economically obsolete much sooner than expected, reported profits could overstate the underlying economic returns on those investments. The market is betting that today’s AI infrastructure will continue generating value for years as AI adoption expands, much like the potential of a rapid application development platform.