Big Tech’s Cause for Hope: Link Between Mag 7, S&P 500 Is Broken

(Bloomberg) — For most of its three-year bull run, the S&P 500 Index (^GSPC) has moved in lockstep with the shares of technology giants. But the relationship is suddenly breaking down — and that could be good news for languishing tech stocks.
The correlation between an index tracking the so-called Magnificent Seven and the equal-weighted version of the S&P 500, which more accurately reflects the full performance of all the stocks by removing the weighting of the biggest companies, turned negative on Feb. 23, an indication that they were becoming untethered. Since then, the correlation has continued to fall as the war in Iran disrupts markets and sparks a jump in oil prices.
“We’ve never had a tech cycle move this quickly,” said Daniel Newman, chief executive officer of the Futurum Group. “We just don’t know what will come next.”
The correlation has been more negative than it is now only one other time since the start of 2016. In the first quarter of 2023, the Magnificent Seven — which consists of Nvidia Corp., Apple Inc., Microsoft Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Tesla Inc. — raced ahead as artificial intelligence euphoria kicked off in the wake of OpenAI’s release of ChatGPT on Nov. 30, 2022. Meanwhile, the rest of the S&P 500 remained dormant as it struggled to emerge from a bear market.
From January through March 2023, the Magnificent Seven index climbed 45% while the regular S&P 500 gained 7%. Eventually the tech enthusiasm spilled over into the broader market, as the S&P 500 finished 2023 up 24% and rallied another 23% in 2024.
This time, the correlation breakdown comes after several months in which the Magnificent Seven lagged the broader market amid concerns about heavy spending on AI. From the end of October through February, the Bloomberg Magnificent 7 index fell 7.3%, compared with an advance of 8.9% for the S&P 500 Equal Weighted Index, led by cyclical sectors like energy and materials.
In the weeks since the correlation turned negative, the gauges have swapped positions. While the Big Tech cohort sank into a correction this month, their decline has been smaller than that of the broader benchmark.
A Different Place
Of course, the market is in a very different place now than it was three years ago, with the war in Iran casting a shadow over everything. Meanwhile, Big Tech’s performance has been hampered by concerns that weighed on the stocks before the fighting started, namely heavy spending on AI and the disruption the emerging technology will bring.
“A couple years ago, when Mag Seven correlation was higher, you had Nvidia delivering these huge upward revisions,” said Jonathan Cofsky, a portfolio manager at Janus Henderson Investors. “We weren’t as concerned about capex and ROIs, there weren’t concerns about AI and software, and we didn’t have a memory crunch at Apple.”
The last time correlations were this negative, it marked the start of a period of dramatic outperformance for Big Tech. From the start of 2023 to Feb. 23, the Magnificent Seven index soared more than 300% while the equal-weight S&P 500 rose just 42% and the regular S&P 500 climbed 78%.
While few Wall Street pros expect a reprise of that performance, there are reasons to be optimistic that Big Tech is primed to reestablish its market leadership. The stocks’ retreat has washed out positioning and pushed valuations to attractive levels, creating conditions for outperformance, according to Ohsung Kwon, chief equity strategist at Wells Fargo.
“We’ve seen one of the most extreme relative outflows from US equities and into international,” Kwon said, noting that the flip was jumpstarted by the Trump administration’s tariff plans last April. “That’s been a crowded trade, and with this war breaking out that’s actually starting to reverse. And the most obvious beneficiary of that is going to be tech, and more specifically, Big Tech.”
The Magnificent Seven index is priced at less than 25 times estimated profits, down from almost 33 times in October and below its 10-year average of 29, according to data compiled by Bloomberg. It’s at the lowest level since the tariff tantrum in April.
A resurgence in the tech giants would be a significant positive for the broader market, considering the seven companies account for about a third of the market capitalization-weighted S&P 500.
“We’re getting to a point where Big Tech becomes irresistible,” Futurum’s Newman said. “You can sleep well at night if this is where you’re parking your money in this environment. They’re so durable and so entrenched, and they’ve over-delivered quarter after quarter.”
Nvidia Stalls Out
There’s one big problem for bulls, however: Nvidia. The most valuable company in the world — and therefore the biggest weighting in the S&P 500 — has stalled out. After soaring more than 1,100% from the end of 2022 through July, the stock has traded sideways for seven months amid concerns that its rapid growth is peaking and with investors souring on heavy AI spending by its biggest customers.
That skepticism was evident last week when Nvidia Chief Executive Officer Jensen Huang’s forecast for $1 trillion in data center sales through 2027 failed to excite investors. Despite plenty of other good news delivered at its annual developers conference, including Chinese government approval to resume AI chip sales in the country — the stock ended the week down 4.1%.
“The market’s telling you estimates are too high,” said Randy Hare, portfolio manager at Huntington National Bank, which holds Nvidia shares. “We don’t believe that and so we think that the stock is relatively attractive.”
Another hurdle for Big Tech is the deterioration in the companies’ free cash flow due to the race to add AI computing infrastructure. The biggest spenders — Amazon, Microsoft, Alphabet and Meta — are projected to post combined free cash flow of $94 billion this year, down significantly from $205 billion in 2025 and $230 billion in 2024.
Even with the big AI stocks’ cheaper valuations, skepticism about data center spending and the depreciating assets now on their balance sheets remains a major issue, according to Michael O’Rourke, chief market strategist at Jonestrading.
“The hyperscaler’s business models have shifted so they deserve lower valuations,” O’Rourke said. “The 30% valuation gap between the S&P 500 and S&P equal weight is well worth it for investors to rotate to equal weight, especially if you want to ride out volatility.”
Still, the Magnificent Seven continues to put up superior earnings growth. Profits are expected to rise 19% in 2026, compared with 14% for the other 493 companies in the S&P 500, according to data compiled by Bloomberg Intelligence.
That ability to churn out higher profits than the rest of the market is what ultimately matters most to investors, according to Futurum Group’s Newman.
“The performance of these companies should be lauded,” said Futurum Group’s Newman. “It is hard to look at the performance they’re delivering and not ask: Why would you want to be anywhere else?”