THE Bloomberg Magnificent Seven Price Index, an equal dollar-weighted benchmark tracking seven tech giants — Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla – delivered strong returns in 2023 and 2024. However, it recorded its worst quarterly performance since Q3 2022, with the index down by 16 per cent in Q1 2025. This decline outpaced the benchmark Nasdaq Composite Index, which lost 10.4 per cent over the same period.
Several factors have contributed to this downturn. Firstly, the AI-driven rally that propelled this basket of stocks in recent years has lost some momentum. The emergence of DeepSeek, with its cost-efficient AI model, has raised doubts about the profitability of large AI capital expenditures and earnings growth projections for big tech companies.
Secondly, the Magnificent Seven basket also came under pressure amid broader market weakness. Recent sluggish US economic data has heightened recession fears as trade war concerns dampened consumer confidence to the lowest level in over four years, coupled with rising inflation expectations and increasing federal employee jobless claims attributed to the work of the Department of Government Efficiency. In response, investors have shifted to defensive, safe-haven assets such as gold and US Treasuries, further weighing on the performance of high-growth tech stocks.
Thirdly, after years of outsized gains driven by AI optimism, concerns over overvaluation have emerged. The current price-to-earnings ratio for the Magnificent Seven stands at 31 times, which is above the historical average of 28 times. Investors are raising questions about the companies’ ability to justify their lofty valuations with consistent earnings outperformance.
From a technical perspective, the Magnificent Seven Index has breached critical support levels, indicating potential further downside. In early March, the Bloomberg Magnificent Seven Price Index broke down a long-term uptrend support line it had been holding above since October 2023. Concurrently, the index broke below the 200-day simple moving average (SMA), a key barometer by traders for determining the overall long-term market trend, for the first time since the October 2022 bear market bottom. Subsequent price action that followed this breakdown also gives credence to potential further downside.
Although the index pulled back towards the 200 SMA, it failed to reclaim the level, turning this previous support into resistance. In conclusion, the poor start for the Magnificent Seven sector in 2025 is the result of a confluence of factors, including the fading AI momentum, economic concerns and valuation headwinds. Given current conditions, we are likely to see further cooling in the performance of the Magnificent Seven index, with another 20 per cent pullback potentially bringing it down to the 18,500 support level. As investors favour other sectors and asset classes in the meantime, the once dominant Magnificent Seven appears to be taking a breather from market leadership, waiting for a catalyst to reignite the momentum.
The writer is research analyst at Phillip Securities Research
