Why the Magnificent Seven Are Dominating Markets Again

The Magnificent 7 have officially reasserted their dominance, breaking out of a summer slump to outperform the broader market once again. On CNBC's halftime report recently, host Scott Wapner and his investment committee debated whether this big tech resurgence is a temporary bounce or a fundamental shift. By the end of this video, you'll know exactly why the underlying earnings data suggests this rally is built on real cash flows, not just hype. >> This is a six-month look MAG 7 versus the S&P 500. And you can see the very end to the right that the Mag 7 has started to outperform again. Look at between June and July, from July to August, you did have underperformance from the MAG 7 versus the S&P 500. Market felt a little dicey at times during that stretch. But as Mike also said, maybe it was earnings from these big technology companies that restarted this outperformance trend. I thought we'd jump off there because I think it's meaningful to the market. >> I think it is too. And you know, where I look in the Mag 7, Scott, is particularly at Nvidia. Um, I really think to me that's where the turnaround in the Mag 7 came. Now, we talked last week about how good Nvidia's earnings were. We liked the stock response, but that it hadn't flown through. At least last week, it didn't flow through immediately. uh to the rest of tech space. I think that was just a delayed reaction. And I'm also happy to say that it's not just chips. In fact, it's things like Microsoft. It's things like Meta. Um so I I to me it was really Nvidia the clearing event. That was the term that we used. Um that tells us that the AI capex is going to continue that it's profitable, which by the way to Mike's points about earnings, that's what we heard in the earnings season is that all of this capex is profitable. Andrew Jasse, CEO of Amazon, saying things like it takes less than three years to recoup the cost of a new data center. Uh, excuse me, Alphabet growing its uh, web services at 80%, Microsoft Azure at 40%. There are fundamental earnings-based reasons why the Mag 7 is performing. And on top of that, the valuations are not too hard to justify. >> Nvidia is up 7 well, now it's 6%. It's peeled back a little bit off of where it was when we started. It was up as much as 7 and a half% this week. They did the hugging face deal. Uh their investments are growing. I'm wondering how you see I I just think that what Mike took a look at as sort of he usually does, he has really just great insight into what's really happening underneath the surface. If this is going to be the case, if the MAG 7 has now reasserted itself, what does that mean for where we go from here in a month that has historically been unkind? So, I'm less concerned about the timeliness of the market. This being September. One month has to be the worst month, Scott. It just happens to fall in September. So, I trend I tend not to trade around the tarot cards or the farmers almanac. But what I liked about the opening from both of you is you didn't talk about the Mag 7 as an acronym. You both talked about Nvidia. So, what we're doing is we're isolating the winners within the MAG7, but the reason that they're performing well collectively is exactly what you said. It has to do with earnings. And to me, more importantly, it had to do with the guidance. So, we're looking at companies that are improving returns. Yes, they're spending a lot, but we're starting to see a return on that investment. And most importantly to me, we're seeing the valuations from the fundamentals from the PE ratios. We're seeing them stay within range. So, the stocks are moving higher, but in essence, they're getting a little bit cheaper. >> Not lost on us is Microsoft may be playing the biggest role in this resurgence, if you want to call it that. Let's look at that chart that we've been showing everybody from earnings day until today. Thank you guys. There it is. 27%. This stock got a reboot after I think a bit of a squirrely price action. Rob, uh, in this market, everybody owns that name. I'm wondering what you make of the things that Mike has looked at, but also that maybe this is the one. It doesn't get the headlines that the Nvidia does. And you know, we're going to talk about Meta in a second cuz it's had a week for sure. Uh, but this is as important to this trade as anything, maybe more emblematic than anything else to that comeback. >> Certainly because of its weight in the index as well. It's a it's a significant contributor. It's been kind of a kind of a lagard over the last year. It's basically been a flatliner over the last year. It's up a little bit year to date. PE's come in quite a bit on Microsoft. But I still think it's one of the highest quality tech broadbased tech names in the world. Uh you know their strength was on full display in their latest earnings report. >> Let's show the six month now guys. Go ahead. Go ahead Rob. >> Yeah. And I just think as we get into this period of uh you know weak seasonality uh tough tougher coming into a period of possibly tougher comps. You're seeing concentration and weakening breadth in the market. And why is that happening? Because these are the highest quality names in the world. They're actually delivering. >> See how that trends to exactly what we looked at as the Mag 7 as a group. That period June July when you had, you know, a swoon in this name hadn't really done anything. Did a little bit of a sideways trade. They come out with earnings and boom. And Nvidia, right? That that thing hadn't traded all that well. They come out with earnings. Then boom. Apple, you're less than a week away now from their big event. I said Metawise over the last couple days has had uh some great moves. It's had a week in its own right. But what about this notion? What do you think it does mean if this is going to be now something to to bank on that big tech's really really back from a stock performance standpoint? >> Yeah. Look, I think what it means is that the AI trade is still something to focus on and that people believe in the AI trade, but now they're being more selective. So, they're going to the companies that have shown that they can generate revenue and ROI return investment. And that was Microsoft. Meta came out and it didn't do do so well post quarter, but then they talked about part of that, by the way, was because everybody thought they were going to the cloud business. Those were the rumors, but they came out and they said something different that we're going to now be in the AI model business. We're going to offer those opportunities. So, I think that's had a lot to do with Meta showing they're still smart that Zuckerberg can still navigate virtually any troubled waters as far as AI and also it's the comfort that you get in these names. So despite that they've taken on debt, their debt costs are very very low relative to what we're seeing otherwise with other companies. So you've got safety in these companies still. You've also got the known factor of these companies and you got valuation as Jim points out that's attractive pretty much across the board. So that's why the concentration's occurring here. And you take a look at others like cat you know goes here and there but still it's well off its highs. G Vernovo well off its highs making a comeback but they really are much more volatile to the than these uh these names of Mag 7. Well, because that's like th those are the kinds of names that are squarely in the center of the data center debate and and you would expect charts to look like that as you know as backl I wish you could put a chart up back a data center backlash versus AI power names like a Vernova for example for example cuz you you'd see one going like this and the other one going like this um so that that's very much been a story too I think >> AI which I is the poster child. Now, if you take a look at they've had great news and the stock is, you know, hanging around here. Yesterday, I had a good day, but it got down to 184 on what? On just what you're talking about, data center debate. >> Wapner kicked off the debate by pointing to a critical six-month chart prepared by senior markets commentator Mike Sani. This chart tracked the performance of the Magnificent 7 against the equal weighted S&P 500, showing a stark period of underperformance between June and August. Wapner pointed out that the market felt incredibly dicey during that summer stretch. But a sudden pivot occurred right as corporate earnings began rolling in. One committee member immediately seized on this, pointing directly to Nvidia as the absolute catalyst for the entire sector's turnaround. They argued that while Nvidia delivered blockbuster earnings, the market initially suffered a delayed reaction, failing to bid up the rest of the technology space right away. My take on this delayed reaction is that the market was suffering from a temporary crisis of faith. Investors were looking for a reason to sell the news, but the sheer gravity of Nvidia's numbers eventually forced capital back into the trade. When a company is growing its top and bottom lines at tripledigit rates, you can only ignore the fundamental reality for so long before the index tracking forces your hand. This debate over Nvidia's massive numbers naturally led Wapner to push the panel on how this spending affects the broader market. Wapner pressed the panel on whether this massive spending is sustainable, and the committee described Nvidia's earnings print as a major clearing event. They explained that before the print, the market was bracing for a potential capital expenditure bubble burst, fearing that these tech giants were throwing tens of billions of dollars into a black hole of infrastructure with no clear path to monetization. The committee argued that instead of warning of slowing demand, the largest companies in the world confirmed that they are not only continuing to spend at an unprecedented scale, but that this capital expenditure is actually profitable. Where I land on this is that the bearish argument comparing this to the late '90s fiber optic overbuild starts to fall apart completely. We aren't looking at speculative infrastructure built on empty promises. We are looking at real cash generating demand. This discussion on the profitability of tech spending prompted the committee to bring up a specific jaw-dropping detail from Amazon to prove just how fast these investments are paying off. To ground this capital expenditure debate in concrete numbers, the committee highlighted a key detail dropped by Amazon CEO Andrew Jasse regarding the actual return on investment for these facilities. Jasse noted that it takes less than 3 years to recoup the cost of a new data center. The panel used this to explain why Alphabet's web services sector is growing at a staggering 80% while Microsoft's Azure cloud business is clocking in at 40% growth. Think about the sheer scale of that return. In traditional asset heavy industries, building a physical facility of that size usually requires a decade or more just to break even. For a tech giant to recoup billions of dollars in capital expenditure in under 36 months tells us that corporate demand for cloud compute and AI capacity is an immediate high margin reality. This rapid monetization naturally led Wapner to guide the conversation back to Nvidia's grip on the software layer of this buildout. If this has been worth your time so far, like the video and subscribe to the channel and let's keep moving. Wapner pointed out that Nvidia's stock had peeled back slightly to a 6% gain after hitting highs of 7 and a half% earlier in the week and he asked the committee how they viewed Nvidia's latest partnership with HuggingFace. The committee responded by arguing that Nvidia is systematically embedding itself into every layer of the AI software ecosystem. It is no longer just a hardware play selling chips to hyperscalers. Through strategic partnerships and growing investments, Nvidia is ensuring that its software stack becomes the industry standard for developers worldwide. What I make of this is that investors waiting for a cyclical peak in chip sales are fundamentally misunderstanding the structural transition taking place. This is not a temporary hardware upgrade cycle. It is the construction of an entirely new computing paradigm and Nvidia is locking in the software keys. With the tech giants executing so well, Wapner shifted the focus to the calendar, asking if seasonal worries could still derail the rally. Wapner challenged the panel on whether the notorious September seasonal headwinds, which historically make it the worst month of the year for equities, should make investors cautious. One committee member completely brushed aside this seasonal anxiety, stating that he refuses to trade around tarot cards or the farmer's almanac. He argued that while one month of the calendar year has to be the worst performing on average, trying to time your portfolio based on a calendar flip is a fool's errand. The committee emphasized that while the Magnificent 7 experienced a painful sideways chop during the summer, the individual winners are now successfully decoupling from the pack based on their actual earnings execution. I love this push back because calendar seasonality is a statistical average, not a fundamental driver. What actually matters is the underlying fundamental momentum of the individual companies you own, which led the panel to debate a specific tech giant that had been lagging. Nobody wants to manually turn this massive annual report into a presentation. So, watch this. I'm going to transform it into a professional presentation outline in under 5 minutes. I upload the report to Naratorra. Narrator analyzes the source and recommends the appropriate workflow. I select presentation outline, choose my settings, and generate. And there it is, a slide by slide presentation with talking points and suggested visuals built from the original report. No complicated prompting, just a few clicks. This is Narria, generative content automation. Turn your sources into finished content at narrator.com. Wapner turned the committee's attention to Microsoft asking why it had been a notable lagard over the recently committee member Rob explained that Microsoft had essentially traded sideways and flatlined before its latest earnings report but he argued that this period of underperformance actually created a massive opportunity. Rob pointed out that while the stock price stalled, Microsoft's earnings kept growing which caused its price toearnings multiple to contract significantly and turn the stock into a coiled spring. My take is that when a high-quality business gets cheaper on a valuation basis while its underlying earnings continue to strengthen, it is a massive gift to patient investors. Microsoft's multiple contraction set up a powerful upward draft for the whole index because of its massive weight in the S&P 500. This recovery and investor confidence prompted Wapner to contrast Microsoft's steady compression with Meta's highly volatile journey. Wapner noted that Meta had put together an outstanding week, but he pressed the committee on how Mark Zuckerberg managed to overcome the initial skepticism that plagued the stock after its previous earnings report. The committee explained that Zuckerberg pulled off a brilliant narrative pivot when the market feared Meta was going to turn into a low margin cloud infrastructure utility. Instead, Zuckerberg made it clear they are focused on building and offering foundational AI models, leveraging their low debt costs to fund this massive buildout while keeping their valuation highly attractive. Where I land on this is that Zuckerberg's pivot was a masterclass in corporate communication. By framing Meta as an AI model powerhouse rather than just an infrastructure spender, he turned a massive capital risk into a competitive moat. But this massive infrastructure spend sparked a deeper debate on the panel about the physical limits of the AI buildout, leading Wapner to contrast software giants with the physical industrial companies. Wapner asked the committee why the physical picks and shovels companies aren't keeping pace with the software giants if the infrastructure buildout is so massive. The committee contrasted these softwaredriven tech giants with heavy equipment players like Caterpillar and GE Vernova, pointing out that Caterpillar is trading well off its highs, and GE Vernova has been highly volatile. They explained this divergence through a concept they called the data center backlash. They argued that while software giants can scale their algorithms instantly, industrial companies trying to build the physical power grid are running headfirst into utility delays, local grid capacity limits, and massive supply chain bottlenecks. This physical friction is a critical reality check. It is far safer and more profitable to own the cashrich software companies that lease the capacity rather than the volatile industrial companies trying to build it. This physical bottleneck led the committee to their final conclusion about where the real safety lies in this market. Wapner asked the panel what this physical friction means for investor positioning moving forward. The committee argued that in a macroeconomic environment filled with seasonal noise and physical infrastructure bottlenecks, these big tech giants represent a unique combination of absolute safety and massive high margin growth. They have the cleanest balance sheets, the lowest borrowing costs, and the most direct path to turning capital expenditure into realized earnings. My take on this is that the era of speculative AI hype is officially over, and the era of fundamental execution has begun. The market is no longer rewarding companies just for mentioning AI in their press releases. It is rewarding the select few that can prove a real rapid return on investment. If you want to navigate the volatility of the coming months, stop focusing on calendar seasonality and start focusing on the companies that are successfully converting their massive capital expenditures into real cold cash flow. Thanks for sticking with me all the way through. 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