TLDR
- The Magnificent 7’s valuation premium over the S&P 500 has dropped to just 10%, the lowest in over a decade
- All Magnificent 7 stocks have underperformed the S&P 500 in 2026 except Alphabet, which is up 14.5%
- Big Tech’s AI capital expenditure is projected to exceed $700 billion this year, up 70%
- Morgan Stanley says the stocks are underpriced and recommends buying, citing 45% earnings growth advantage
- Semiconductor stocks have surged ~85% year-to-date as investors rotate away from the Mag 7
The Magnificent 7 tech stocks are now trading at their cheapest valuations compared to the rest of the S&P 500 in more than a decade, according to analysis from Morgan Stanley.
The group includes Nvidia, Microsoft, Alphabet, Amazon, Meta Platforms, Apple, and Tesla. Together, these companies have long traded at a large premium to the rest of the market. That premium has now compressed to just 10%, down from above 30% for most of the 2020s.
The S&P 500 is up around 9% year-to-date. The Roundhill Mag 7 ETF, which tracks the group, is slightly in the red over the same period.
Alphabet is the one exception. It is up 14.5% in 2026, beating the broader index’s 8.8% gain.
AI Spending Is the Main Driver
The core issue is money going out the door. Big Tech is spending heavily on artificial intelligence infrastructure, including data centers and high-end GPUs.
AI capital expenditure across the Magnificent 7 is expected to top $700 billion this year, a 70% jump. That spending is eating into free cash flow, which is expected to fall sharply from its 2024 peak.
Deutsche Bank strategist Jim Reid said there is “growing apprehension regarding the capex spend by the largest hyperscalers.” Investors are not yet seeing a clear return on that investment, and that uncertainty is weighing on share prices.
There is also concern about a potential Federal Reserve rate hike later this year. Higher rates would raise the cost of financing for AI projects, adding another layer of pressure.
Morgan Stanley Sees an Opportunity
Despite the weakness, Morgan Stanley is bullish. The firm’s head of the global investment office, Lisa Shalett, says the hyperscalers look deeply undervalued right now.
The firm points to the group’s 45% annual earnings growth advantage over the rest of the S&P 500 as a reason to buy.
Morgan Stanley is not recommending broad index exposure. Instead, it favors hand-picking specific names in the back half of 2026, focusing on companies with flexible AI designs tied to dominant cloud businesses.
Alphabet, Amazon, and Microsoft are highlighted as likely beneficiaries of a shift away from resource-heavy AI models toward more efficient hybrid approaches.
Nvidia is trading at around 18 times forward earnings, well below its historical average of 36 times.
The semiconductor sector has surged around 85% year-to-date as investors backed hardware makers directly. Morgan Stanley suggests fading that trade and rotating back into the Mag 7.
Reid noted that while AI enthusiasm is strong globally, “leadership in the market has shifted away from the Mag 7 for now.” Morgan Stanley and other Wall Street firms remain constructive on the group over the next 12 months.
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