Has the Time Come to Look Beyond the Magnificent Seven?

The Magnificent Seven have powered much of the market's gains over the past few years but investors have now started to question if the next phase of returns could come from other parts of the market.

Investing in US equities for most of the past three years has largely meant investing in the Magnificent Seven. Apple, Microsoft, NVIDIA, Amazon, Alphabet, Meta Platforms and Tesla have produced exceptional shareholder returns which helped drive much of the S&P 500's gains. Their influence has become so large that the ten biggest companies now make up about 40% of the entire S&P 500 which is the highest level of concentration in the index's history but 2026 is starting to show a different trend. The AI revolution is firmly in place but investor interest is gradually moving beyond the largest technology companies towards a much wider group of businesses that benefit from the same long-term trends. This does not suggest the end of AI investing but it does indicate that the next phase of the bull market could reward diversified portfolios with high-quality businesses.

One of the strongest signs of this shift is the impressive performance of US small cap stocks as the Russell 2000 Index has risen about 19.5% so far this year which has put it on track for its best annual performance since 2003. The S&P 500 by comparison has gained around 10.2% but the Magnificent Seven have returned less than 3% as a group over the same period. 

The largest technology companies are still investing heavily in artificial intelligence as Amazon, Microsoft, Alphabet and Meta are expected to spend about US$725 billion on AI infrastructure this year alone. These investments support their long-term competitive positions but the Magnificent Seven became well known because of their outstanding ability to earn high returns on invested capital while also producing enormous free cash flow. Today much of that free cash flow is going towards large capital expenditure programs for AI infrastructure and many investors are now questioning whether future returns on capital will stay as exceptional once these investment cycles are complete.

Why diversification has become more important

When the largest ten companies account for about 40% of an index with 500 businesses then many good and innovative companies receive much less representation even though some have market capitalisations above US$200 billion. Investors who buy a traditional market capitalisation weighted index may therefore have much lower exposure to many high-quality businesses because the largest technology companies dominate the index.

This shift in market leadership is also reflected in the views of Goldman Sachs Asset Management which expects the Magnificent Seven to underperform the equal weighted S&P 500 in 2026. 

Looking beyond the Magnificent Seven without ignoring them

Looking beyond the Magnificent Seven does not mean investors need to abandon them. Their balance sheets along with innovation capabilities and competitive advantages remain among the strongest in the world. They are also likely to keep playing major roles in the AI revolution. Investors who are concerned about concentration risk may simply want to broaden their exposure instead of relying so heavily on only a few companies.

One practical option is to invest through equal weighted S&P 500 ETFs where every company receives a same portfolio weight rather than allowing the biggest stocks to dominate returns. This approach will provide broader exposure to the US corporate market while still allowing investors to participate in overall market growth. Another approach is to look at value focused businesses that trade at attractive valuations while still maintaining strong competitive positions. Lululemon Athletica for example is trading near its lowest ever price/earnings multiple even though it is a highly profitable business with a globally recognised brand and significant long-term growth opportunities. 

Conclusion

The AI revolution is one of the strongest long-term investment themes of the coming decade but history has shown that market leadership rarely stays concentrated forever. Rather than asking whether investors should own the Magnificent Seven or everything else, investors may be better served by asking whether their portfolios have become too concentrated in yesterday's winners. The next phase of the AI investment cycle could reward investors who continue to own exceptional businesses while also expanding their exposure to the many companies that are quietly benefiting from one of the biggest technological transformations in history.