Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, rose 1.2% this week.
  • Despite their large weight in the US stock market, the lagging returns of the Mag 7 stocks have not dragged down the S&P 500.

The “Mag 7” stocks - Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla – are some of the best-performing stocks over the last decade. These big tech names have come to represent a large weight in the US stock market, which has caused some investor consternation about potential concentration risks.

Since last fall, the Mag 7 names have lagged other big tech names and even, shockingly, small cap stocks. Despite concerns about the market’s concentration in the Mag 7, their struggles have not led to poor performance for the overall market as represented by the S&P 500 index.

Instead, other sectors of the stock market have picked up the slack. AI “picks and shovels” names such as Caterpillar and GE Vernova have been strong.

There has also been a striking shift in free cash flow generation from the big hyperscalers (who make up much of the Mag 7) to semiconductor firms such as Micron and Applied Materials. As it turns out, these companies need large quantities of microchips of all sorts, including memory chips. Semiconductor names are raking in profits, supported by hyperscaler spending as the capital investment in AI continues apace.

The chart below is a stark visual of this redirection of free cash flow towards chip designers and manufacturers:

The AI hyperscalers would surely like to persuade investors that all this investment should pay off in the future, and the lines on this chart will reverse course. Timing the winning sector or company is a very difficult task as these rotations occur quickly. It is hard to know when a rotation that has staying power has occurred until well after the fact. Diversification remains a critical risk management discipline to ensure any rotations are captured in portfolio returns.

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