The Magnificent Seven stocks, comprising Alphabet, Amazon, Apple, Meta Platforms. Microsoft, Nvidia and Tesla, have been among the best performing investments over recent years. They contributed to a major part of the very strong double-digit returns of the S&P 500 index over the past few years as they made up 35% of this important index until some months ago.
However, until the ceasefire rally that took place last week, all seven equities had suffered double-digit percentage declines over recent months. Collectively, these seven companies have shed over $2 trillion in market capitalisation from their peak valuations.
Microsoft ranks as the worst performer across the Magnificent 7, with a downturn of over 30% from its July 2025 peak of $555.45 as a result of a re-rating of the growth trajectory of Azure, the company’s aggressive capital commitments, and the slower-than-expected monetisation of Copilot enterprise. Microsoft invested heavily in OpenAI, which powers its Copilot AI tools, but other large language models (most especially Anthropic) have surged in popularity in recent months.
Meta Platforms’ share price is also in ‘correction’ territory with a 20.3% drop from its 52-week high of just below $800. Apart from concerns about the huge increase in investments in AI, the company suffered from damaging legal setbacks that put additional pressure on its share price, apart from continued layoffs from multiple business units.
AI spending
One of the most significant factors weighing on a number of components of the Magnificent 7 are the huge investments taking place in semiconductors, data centres, cloud platforms and network capacity. Alphabet, Amazon, Meta and Microsoft are collectively expecting to invest nearly $700 billion in 2026, representing an increase of almost 60% from the capital expenditure levels of 2025.
Investors are increasingly questioning the return on investment from this huge capital expenditure being committed by these companies. Amazon announced it would spend $200 billion on AI infrastructure this year while Meta’s guidance was of $115 to $135 billion in capex for FY2026. Microsoft committed over $80 billion to AI infrastructure in its current financial year.
The deteriorating free cash flow of some of these companies has continued to concern investors. For the first time in several years, Microsoft is expecting short-term downward pressure on its free cash flow due to increasing capital expenditures aimed at scaling its AI infrastructure. Moreover, Amazon recorded a decline of $11.2 billion in free cash flow during Q4 2025.
Impact of Iran war
The US-Israeli military operation against Iran, which started in late February, has resulted in an energy supply shock to the global economy with direct consequences on the technology sector and on broader investor sentiment.
Higher energy prices lead to increased costs for data centre operators which in turn pile more inflationary pressures in the US and in other parts of the world. Although there was political pressure on the Federal Reserve to continue cutting interest rates, the Fed signalled that the federal funds rate will remain at current levels for the rest of the year.
The investment case of several Magnificent 7 companies has always rested substantially on the present value of future earnings from AI monetisation and from autonomous vehicles, for example. An increase in the discount rate due to higher yields leads to a decline in the present value of future cash flows, with a direct impact on the share prices of ‘growth stocks’, especially those of the Magnificent 7 companies.
The ceasefire rally
Last week’s announcement of a two-week ceasefire between the US and Iran, which was agreed barely two hours before President Trump’s threatened deadline to obliterate what he described as a “whole civilisation”, triggered one of the strongest daily market rallies in over a year, with the S&P 500 index gaining over 2.5%, and the tech-heavy Nasdaq Composite rising over 2.8%. Last week the Nasdaq Composite surged 4.7%, its best performance since late 2024, as the threat of an immediate regional escalation subsided.
Amazon and Meta Platforms emerged as the Magnificent 7’s top performers last week. Apart from the broader relief rally from the geopolitical developments, Meta’s share price responded positively to its strategic AI announcements after it unveiled its new proprietary large-language model Muse Spark.
In the next reporting periods, it will become more evident if the recent downturn across the Magnificent 7 companies is part of a structural reassessment of some names that have generated exceptional returns over the past few years, or whether some or all of the companies are fundamentally cheap and could regain their all-time highs in the near term.
“All seven equities suffered double-digit declines over recent months”
The future direction of the Magnificent 7 stocks will not only depend on developments across the Middle East and its impact on global monetary policy decisions, but mainly also on evidence whether the huge capital spending on AI by Alphabet, Amazon, Meta and Microsoft are starting to generate the expected returns.
Despite the inevitable volatility that has always characterised equity markets over the years, investors need to continue to focus on a long-term view and try to avoid market timing since this is incredibly difficult, as seen in the sharp upturn across most share prices since last week.
As I highlighted in one of my recent articles in which I discussed Warren Buffett’s investment philosophy, especially during periods of heightened uncertainty and a war, the current geopolitical turbulence will eventually be resolved. The S&P 500 has historically always recovered from market downturns brought about by recession fears and geopolitical tension.
In fact, it is worth reminding that a $10,000 investment in the S&P 500 in 2006 would have delivered a return of over 650% during the past 20 years (10.8% per year), which essentially implies that such an investment would be worth over $75,000 nowadays despite the many periods of uncertainty during the Global Financial Crisis, the European Sovereign Debt Crisis, the COVID pandemic, the Russia-Ukraine war, and the current Middle East conflict.
Investors who generally retain equity investments over the long-term and resist acting on short-term anxiety are handsomely rewarded. After all, company earnings and fundamentals matter more than geopolitics.
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