Magnificent Seven valuation premium narrows as megacap stocks look cheaper

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Magnificent Seven valuation narrows

Highlights

The Magnificent Seven's valuation premium over the other 493 S&P 500 stocks has narrowed to 10%, the lowest level in over a decade.
SOXX is up roughly 85% year to date while MAGS is down slightly and the S&P 500 is up nearly 9%, reflecting investor rotation toward semiconductor beneficiaries of AI.
Nvidia's next-12-month P/E ratio has fallen to 18.7 from a historical 36.9, and Bank of America Securities reiterated its buy rating, citing underestimated pricing power.

Valuation gap shrinks in AI stock rotation

As reported by CNBC, citing Morgan Stanley Wealth Management's Global Investment Committee, investors are rotating away from some of the biggest technology names even as their relative valuations become more compelling. The firm says the valuation premium for the Magnificent Seven over the other 493 stocks in the S&P 500 now stands at 10%, the lowest in over a decade.

The shift comes during a difficult year for the megacaps, as investors redirect capital toward semiconductor companies seen as the clearest beneficiaries of the AI buildout rather than the companies funding it. The iShares Semiconductor ETF, SOXX, is up roughly 85% year to date, while the Roundhill Magnificent Seven ETF, MAGS, is down slightly and the S&P 500 is up nearly 9%.

Morgan Stanley Wealth Management says the broader group still holds a 45% annual earnings growth advantage. Lisa Shalett, head of the global investment office at the firm, writes that hyperscalers now look notably inexpensive by comparison and says she would reduce semiconductor exposure while selectively returning to Magnificent Seven names best positioned to emerge stronger in the AI race.

Stock-picking focus shifts to hyperscalers

Shalett says a growing move away from "tokenmaxxing" could favor hybrid AI workflow designs and support hyperscalers such as Alphabet, Amazon and Microsoft. She argues that the high cost and energy demands tied to token-heavy AI adoption are making that approach less attractive for businesses.

Her preference within the group is for companies with dynamic design strategies and custom ASIC racks connected to dominant cloud service businesses. That points to a more selective approach rather than a broad-based call on all seven stocks.

Historical valuation comparisons also suggest some names have become markedly cheaper. Nvidia, for example, has a next-12-month price-to-earnings ratio of 18.7, versus a historical P/E of 36.9, while Bank of America Securities reiterates its buy rating this week. On Tuesday, analyst Vivek Arya says he would buy the dip, arguing the market is underestimating Nvidia's pricing power and long-term growth durability.

Our earlier analysis of Nvidia (NVDA) highlighted a mix of supportive technical positioning and rising near-term risks, as the stock held above key short-term moving averages while momentum indicators leaned bearish. We also noted that Chinese companies were reducing purchases of Nvidia’s advanced AI chips in favor of domestic alternatives, a shift that could pressure sales growth in an important market and keep the stock range-bound in the near term.

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