When the Philadelphia Semiconductor Index surged 83% this year while the "Magnificent Seven" stagnated, Wall Street's top strategists collectively called for a "reshuffle."

The U.S. tech giant group known as the “Magnificent Seven” has barely gone anywhere this year, becoming the biggest obstacle for Wall Street to achieve its year-end goals.

In the first half of this year, the Wind Magnificent Seven Index swung within a wide range and ultimately finished flat versus the price at the start of the year. Over the same period, the S&P 500 rose 9.3%, a gap of nearly 10 percentage points—an annual start for the group that ranks as the second-worst relative performance against the broader market in its history.

As the AI boom continues to drive semiconductors and other technology stocks sharply higher, this giant group—worth about one-third of the weighting in the S&P 500—has clearly fallen behind, putting strain on Wall Street strategists’ year-end forecasts.

Major institutional strategists’ average year-end target for the S&P 500 is 7,824.09 points, implying about 5% upside from Wednesday’s closing price. According to calculations by Bloomberg, if the Magnificent Seven continue to underperform, the other 493 constituent stocks would need to rise an additional 6.8% on top of the roughly 13% cumulative gain they must already have achieved over the course of the year for the target to be met.

Semiconductors steal the spotlight, and the Magnificent Seven become “outsiders”

For nearly the past decade, the Magnificent Seven have dominated the market, but this year they have lost their luster. Capital has instead flowed to the direct beneficiaries of AI infrastructure—chip stocks. The Philadelphia Semiconductor Index has gained 83% year to date.

As a group, the Magnificent Seven have lagged behind more than 300 S&P 500 constituents, including relatively smaller market-cap companies such as Dollar Tree and Hubbell.

Ken Mahoney, CEO of Mahoney Asset Management, said that tech giants such as Meta, Amazon, and Microsoft have been the main sources of funding for AI infrastructure. He said:

The market is not buying the idea that they are throwing massive free cash flow into AI and yet not knowing when they will see a return on that investment.

As pressure to deliver on year-end targets increases, Morgan Stanley, Goldman Sachs, and JPMorgan have all weighed in over the past two weeks, arguing that the Magnificent Seven’s underperformance versus chip stocks and the broader market has gone too far.

In a research report released this Tuesday, Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, wrote that the semiconductor sector is “severely overbought,” and now is the time to revisit the potential opportunities for the Magnificent Seven. She said:

The accelerated backlog of orders and the expansion of pricing power among semiconductor manufacturers and memory suppliers are remarkable, but we believe this trend is unlikely to continue.

Lisa Shalett said she is not forecasting the end of this cycle; rather, she is calling for rebuilding diversified exposure to potential beneficiaries of AI buildout, “re-embracing some of the hyperscale cloud service providers.”

Alonso Munoz, Chief Investment Officer of Hamilton Capital Partners, pointed out:

From current levels, it will be difficult for the S&P 500 to keep moving forward without the participation of the Magnificent Seven, because many sectors that have already surged sharply—such as energy—also face some downside pullback pressure. These names have an outsized impact on whether and how the index moves.

Valuation pullback to a historical low; reallocation appeal emerges

The Magnificent Seven’s sustained pullback this year has noticeably improved their valuations. According to Bloomberg data, the group’s price-to-earnings ratio has fallen from 32.6 times at the end of October last year to 23.9 times. Last month, the valuation premium of the Magnificent Seven versus the S&P 500 narrowed to only 2.4 times, approaching the historical low.

Goldman Sachs partner Rich Privorotsky is extremely optimistic about the AI outlook, but he is “far from convinced” about the direction the market is currently betting on in the value chain.

He believes that once scarcity disappears, holding AI platforms will be more advantageous than holding hardware. In his words, hyperscale cloud service providers “own the toll road itself, not just the cars running on it.”

Some market participants also believe that the S&P 500 may not need the Magnificent Seven to return in order to achieve its year-end target.

Sameer Samana, Head of Global Equities and Real Assets at the Wells Fargo Investment Institute, noted that excluding the seven major giants, the other constituents of the S&P 500 have already gained roughly 14% year-to-date, meaning the broader index could rely on the other stocks to achieve the goal.

Melissa Brown, Head of Investment Decision Research at SimCorp, also said the S&P 500 “could potentially achieve” the 7,824.09-point year-end target through the remaining constituents. Melissa Brown added:

But given that these stocks have lower weights, they would need to record larger gains in order to lift the overall index to that level.

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