What is Magnificent?
While the term “Magnificent Seven” is still commonly used, it no longer adequately describes stock market leadership. It remains a convenient media label, but it increasingly obscures a more consequential shift - artificial intelligence has moved beyond a handful of mega-cap consumer technology companies and into a broad industrial and infrastructure investment cycle.
We have tried to make sure our clients have enough cash on hand for the next two to three years to support withdrawal requirements without needing to sell stocks. That cash is invested in very short-term instruments so it can still earn a return without taking undue price risk.
The Magnificent Seven has not disappeared as a group of influential companies. It has simply become too narrow—and too internally inconsistent—to serve as the market’s primary theme. Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla have very different earnings drivers. Nvidia is tied closely to AI compute demand; Microsoft and Amazon benefit from cloud adoption; Alphabet and Meta combine AI investment with advertising; Apple depends heavily on consumer-device cycles; Tesla is an electric-vehicle, energy-storage, and manufacturing story. Their valuations, capital needs, competitive pressures, and sensitivity to the economy are increasingly different.
In our mutual fund and ETF portfolios, we reduced software, gold, and S&P 500 index exposure in early January. We put the proceeds into industrial materials, Asian and Emerging market equities instead. To date, those markets are outperforming the S&P 500. In March, we took gains in individual stock portfolios where single positions had become too large or had risen an extraordinary amount. Paying taxes is preferable to losing money.
AI is now an infrastructure cycle
AI requires far more than leading software platforms and chip designers. It needs memory, semiconductor manufacturing equipment, networking gear, servers, cooling, data centers, power generation, grid investment, and construction capacity.
These needs expand the investment opportunity to companies across the semiconductor, industrial, utility, networking, and infrastructure sectors. The more useful question is no longer, “Which Magnificent Seven company wins AI?” It is, “Which companies capture the spending needed to build and operate AI at scale?”
How Leadership has broadened
The portfolio implication
We’re not suggesting that investors abandon the mega-cap leaders. Several remain outstanding businesses and central participants in AI adoption. The issue is that owning cap-weighted positions can leave a portfolio overly concentrated in the most visible layer of the AI theme.
A stronger approach separates AI exposure across platforms, chips, manufacturing equipment, networking, data-center infrastructure, and power. This gives investors more ways to participate if spending remains durable while reducing reliance on a few companies. The next market leaders may come from the factories, networks, power systems, and infrastructure behind them. Further, the companies that use AI to develop new products and/or expand their growth may end up being the long-term winners.
The Second Quarter AI Boom Gave Way to a July AI Bust. What Happened?
The broad AI-industrial theme sold off in July because investors stopped rewarding the *promise* of AI spending and began demanding proof of returns. The decline was not confined to the former Magnificent Seven; it extended through semiconductors, equipment, networking, servers, data centers, power, cooling, and related infrastructure. The entire sector had become crowded after a powerful run. Many AI-linked companies were priced for sustained hypergrowth. Once expectations became that elevated, even good results disappointed when they were merely in line rather than meaningfully better than expected.
Factors that drove the July pullback:
- Profit-taking and concentration. Investors often trim large winners after a strong first half, especially where positions have become oversized in indexes and portfolios.
- Valuation compression. Higher interest rates and reduced expectations for Fed easing lower the present value investors assign to long-duration growth earnings.
- Questions about AI monetization. Cloud platforms and software companies may be spending heavily on data centers and chips before revenue from AI products fully catches up. Markets then focus on capital-expenditure intensity, depreciation, and return on invested capital.
- Capex-cycle fears. Semiconductor and infrastructure shares discount future orders well in advance. Any sign of slower order growth, shipment constraints, customer digestion, or postponed projects can cause the entire chain to reprice.
- Crowded thematic positioning. When the same AI winners are widely owned, a shift toward risk reduction can force broad selling across companies with very different fundamentals.
- Geopolitical and policy risk. Export restrictions, tariff threats, supply-chain disruption, and uncertainty around global demand can directly affect chips and indirectly pressure the wider infrastructure complex.
- Rotation into neglected market sectors. Investors may move capital from expensive technology and AI infrastructure shares toward energy, materials, financials, defensives, or smaller companies when valuations and macro conditions favor a broader market.
Companies that are part of the expanded AI theme can trade together during a risk-off episode even though the businesses have different fundamentals. That correlation is a market-positioning phenomenon and can present buying opportunities in some of the stocks.
What to Watch After the AI Selloff
The next phase depends on hard evidence rather than lofty expectations about the future. The list below shows what will likely influence stock direction going forward.
- AI capital-expenditure guidance from the hyperscalers (Alphabet, Amazon, Meta, Nvidia, etc.)
- Order backlogs and lead times for chips, memory, networking, servers, and cooling
- Gross-margin trends, especially for hardware suppliers
- Data-center leasing, power availability, and construction timelines
- Bond yields and real rates, which influence long-duration equity valuations
- Evidence that enterprise AI adoption is producing revenue growth or productivity gains
General Market Outlook – The Good, the Bad, and Our Take
The Good – We thought Jeremy Siegal said it best
“We are seeing double-digit earnings growth despite second-quarter real GDP growth of only about 1.5%, while the magnitude and breadth of earnings beats have been exceptional. Outside of rebounds from severe recessions, it is difficult to find many comparable periods. Earnings are strong, forward guidance is strong and corporate finances remain healthy.” Jeremy Siegal, Strong Earnings Support Stocks Despite Softer Economic Data
The Bad
Higher interest rates, particularly in longer maturity Treasuries, are likely to stick around. There are three pressures on long term interest rates – inflation, growing supply, and a shrinking pool of foreign buyers. Inflation caused by higher oil prices and other costs of the Iran war may not abate quickly. The U.S. deficit is currently projected to be $2 trillion, driven by higher spending on defense, mandatory programs like Medicare and Social Security, and rising net interest costs on the national debt. Interest expense is actually the fastest growing line item in the Federal Budget. Lastly, foreign holdings of U.S. Treasury securities as a share of total marketable debt have fallen from roughly 34 percent in 2013 to approximately 23 percent in 2026.
What About Gold?
The big difference between this gold bull market and previous speculative runs is who’s buying. “Central banks may be accumulating gold because gold has no counterparty. A Treasury bond is somebody’s liability. A bank deposit is somebody’s liability. A currency is ultimately the liability of a sovereign monetary system. Gold is simply an asset sitting outside that chain of promises, and that distinction becomes much more important when governments are running massive deficits, geopolitical alliances are shifting and investors start questioning how much purchasing power their currencies will retain over time. Sovereign buying doesn’t guarantee that gold goes straight up, but it gives the market a structural bid that simply wasn’t present to the same degree in many earlier cycles.
The larger issue is that gold isn’t really trading like a commodity anymore. It’s increasingly trading like an alternative monetary asset. The underlying question isn’t whether jewelry demand rises a few percent or whether another mine opens in Nevada. It’s confidence—confidence in currencies, sovereign debt, central banks and the ability of governments to finance ever-larger promises without steadily depreciating the units in which those promises are denominated. That kind of confidence rarely collapses overnight. It erodes slowly, then suddenly. And once investors begin treating gold not as a trade but as monetary insurance, traditional valuation models start becoming much less useful.” Kerry Lutz, Financial Network Substack
Our take
We continue to believe in AI, but the financing needs of the companies that build AI are at risk of crowding out from the needs of the U.S. Treasury. It is unclear how this will play out but ultimately, as we said in our blogs on AI, we think the baton will pass from companies that make AI possible to those who can use AI to make themselves more productive. Although we like to think our portfolios are magnificent, they are considerably less concentrated than the S&P 500. We own many AI infrastructure providers as well as companies we believe will benefit from using AI. Additionally, we maintain our exposure to gold and gold producers. Our fixed income exposure is short term, and we believe TIPS are increasingly attractive.
U.S. markets started the year on a positive note with the S&P 500 reaching a peak of 6,978 in January, up 1.95% from the 2025 close. Sector rotation was the most notable market activity in the first quarter as investors exited software and Magnificent 7 stocks in favor of old economy sectors such as energy, materials, and industrials. As a result, the Dow Jones Industrial Average delivered much better results, reaching a peak of 50,188 in early February, up over 13% for the year.
2025 began with markets walking a tightrope between optimism and anxiety. Investors were asked to believe in rapid technological progress while navigating geopolitical flashpoints, stubborn inflation, and historically high government debt. Against that backdrop, our investment themes leaned toward quality and earnings growth. As the year unfolded, markets delivered a clear verdict on our ideas, rewarding assets tied to real value, earnings power, and structural change rather than speculation or valuation excess.
The artificial intelligence boom is reaching a critical juncture. After years of explosive growth, the economics of AI are shifting in ways that could upend who actually profits from the technology. While investors have poured billions into building the infrastructure behind AI, history suggests that the biggest winners may once again be the users—not the makers—of this new form of intelligence. Please see our initial blog on AI entitled, AI: The Intelligence Revolution
The coming AI revolution is going to be 100 times bigger than the industrial revolution – 10 times bigger and maybe 10 times faster, says Demis Hassabis, the CEO of DeepMind, the artificial intelligence arm of Google, and Noble Prize winner. We’ve received many questions from our clients about the impact of AI and how best to invest in it. Our first attempt at tackling this important topic follows.
Traditionally, the answer for most investors has been a resounding yes. For decades, many benefited from the positive performance of the standard 60/40 portfolio (60% equities/40% bonds). But times change, and bonds may not provide the security they used to. We review the primary benefits of bonds, discuss which types are the best portfolio diversifiers, and when bonds can be most effective.
There is no ‘one-size fits all’ answer to this question. Every recession or bear market is driven by a unique set of events, and the portfolio strategies that work best depend on the specific causes and the prevailing political and economic circumstances leading to the downturn.
Markets around the world are down today due to Trump’s unexpectedly punitive tariffs. These tariffs are feared to be inflationary and may cause a recession in the U.S. and abroad.
As Lenin famously said,” there are decades where nothing happens and weeks where decades happen.” We find ourselves in the thick of chaos, with daily political announcements and stock market gyrations. We anticipated volatility, but we got more than we bargained for.We work hard at fighting confirmation bias. In this blog, we attempt to understand different points of view and explain the steps we have taken in the current environment.
Deep Thoughts and DeepSeek
In 2024, much of the 25% equity market return came from multiple expansion. Earnings for S&P 500 companies only grew about 10%, but the amount investors were willing to pay for those earnings (P/E multiple) expanded by about 16%. Thus, about two thirds of 2024 equity performance came from multiple expansion.
In memory of famous investor Byron Wien, who was known for his list of 10 surprises each year, we provide our own list of potential economic, financial, and political surprises for 2025.
Is the Recent Runup in Chinese Stocks a Durable Rally or a Flash in the Pan?
In August of 2021, we decided China was un-investable and reduced our exposure to Chinese equities. In our blog “From Beijing to Wall Street” (here), we detailed our rationale.
Halloween Came Early
Ouch. Since August 1, the S&P 500 has fallen over 7%, a dramatic move, but not yet a correction from the July highs. However, the NASDAQ is down over 10% and firmly in correction territory.
What’s Happening Under the Covers
Why the U.S. Economy Has Remained Resilient in Spite of the Fed Raising Interest Rates and Reducing Their Balance Sheet
In memory of famous investor Byron Wien, who was known for his list of 10 surprises each year, we provide our own list of potential economic, financial, and political surprises for 2024.
If you just landed from Mars and we told you that three good sized U.S. banks had failed, the Federal Reserve had raised rates 5% in 13 months, the yield curve had been inverted since last year, the latest Senior Loan Officer’s Survey showed banks less willing to lend while already at recessionary lending levels, and according to Treasury Secretary Janet Yellen, we are within two weeks of the government running out of money to pay its obligations, would you believe the S&P 500 is up about 9% thus far this year?
How Banks Work
What Causes Banks to Fail
How the Government is Responding
How Bank and Brokerage Accounts May Be Protected
Dilemma for the Federal Reserve
We suspect most people think getting inebriated is more fun than sobering up.
We hate to sound like a broken record and ruin the party, but inflation presents a problem which won’t be easily fixed.
The four most dangerous words in investing are “this time is different”.
A Tongue in Cheek Guide to the Latest Investment Concepts
Mine your reward coins as you read our blog!
Who doesn’t love the story of David’s triumph over Goliath? This past week a group of “small” investors made tremendous amounts of money (on paper at least) by buying stocks that were heavily shorted by large, sophisticated hedge funds.
Markets hate uncertainty, and we can’t remember an election with such potential disparate outcomes. As we speak, the presidential race looks closer than ever, and the Senate majority is in question. Meanwhile the pandemic rages, and the President and Congress can’t agree on a stimulus plan. It’s no surprise stock market volatility has risen.
Fires are burning. The presidential election has never been more heated, and our whole election process is repeatedly questioned. The cold war with China continues to brew regardless of the political party in power. A global pandemic has taken hundreds of thousands of lives and jobs, created loneliness for our seniors, and caused those entering hospitals for medical procedures to endure alone.
He woke up today and asked us for an update. We explained there was a global pandemic that had claimed almost 400,000 lives worldwide and more than 100,000 in the United States.
How can we treat our ailing financial markets?
Medical experts say widespread lockdowns and social distancing must happen to contain the coronavirus and avoid overwhelming our hospital system.
the Coronavirus
Bombs and tweets couldn’t sink the S&P 500, but Covid-19 did.
While there is a role for gold in a diversified portfolio, gold is not universally liked or owned by investors and wealth managers.
The rates on overnight repurchase agreements, known as repos, suddenly rose above 9% last week.
We never really know where markets and the economy are headed, but market participants constantly look for clues.
Why does the current market tone feel different from the February and March stock market selloffs?
When do they protect you? When do they hurt you?
Worst Day Ever for the Dow Jones Industrial Average!
Perspective As the current bull market ages (from the bear market end in March 2009) investors are increasingly worried about buying at the peak.
The basic difference between a mutual fund and an exchange traded fund (ETF) is that an ETF trades like a common stock as its price changes throughout the trading day.
Brexit is spurring a flight to quality move into US Treasuries.
The short answer is yes.
