The Magnificent Seven's Profit Slowdown: Why 18% Growth May Actually Help the Rest of the Market

For the past two years, a simple investing strategy worked remarkably well: buy the Magnificent Seven and ignore everything else. Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla delivered outsized returns while the rest of the market struggled for attention. But 2026 may finally be the year this dynamic shifts.

The Convergence Begins

Profits for the Magnificent Seven are expected to climb about 18% in 2026—the slowest pace since 2022. More significantly, this isn't much better than the 13% rise projected for the other 493 companies in the S&P 500. After years of extraordinary divergence, earnings growth is converging.

This matters because equity returns ultimately follow earnings. When the Magnificent Seven were growing profits at 30-40% annually while the rest of the market grew in the single digits, their market capitalization dominance was justified. As that gap narrows, the case for broader market participation strengthens.

"Former Cisco CEO John Chambers believes 2026 will be a year of divergence within the Magnificent 7 itself. Some will continue to execute, while others face their own challenges."

— Market commentary

The Concentration Problem

The Magnificent Seven now represent approximately 35% to 40% of the S&P 500's market capitalization. This concentration creates risk that investors have largely ignored during the bull run. As Bank of America strategist Savita Subramanian notes, the index has "never been more expensive" and "risks abound."

For investors with index exposure, this concentration means a problem with any single Magnificent Seven stock disproportionately impacts portfolio returns. The ongoing challenges at Tesla—where 2025 deliveries declined for the first time—illustrate this risk.

Money managers are taking notice. The "equal weight" S&P 500 approach is trending as a stock call for 2026, representing a bet that the other 493 companies will finally have their moment.

Why the Slowdown Is Happening

Several factors are contributing to the Magnificent Seven's decelerating profit growth:

Base Effect: After years of extraordinary growth, the law of large numbers applies. Growing a $400 billion revenue base by 20% is inherently harder than growing a $200 billion base by 20%.

AI Investment Cycle: The Magnificent Seven are spending aggressively on AI infrastructure—combined capital expenditure is expected to exceed $200 billion in 2026. These investments will drive future growth but compress near-term margins.

Competitive Pressure: AI is democratizing capabilities that once differentiated the tech giants. Open-source models and commoditizing infrastructure mean competitive advantages are harder to maintain.

Regulatory Headwinds: Antitrust scrutiny of Big Tech continues, creating uncertainty around business model sustainability for several Magnificent Seven members.

Where the Growth Is Migrating

As Magnificent Seven growth decelerates, other sectors are seeing improving fundamentals. The financial sector is experiencing a dealmaking renaissance, with global investment banking revenue rising 15% to almost $103 billion in 2025. Banks reporting earnings this week are expected to show strong capital markets results.

Healthcare is benefiting from an M&A boom as Big Pharma addresses its $170 billion patent cliff by acquiring innovative biotech companies. Energy stocks have stabilized after years of underperformance. Industrial companies are seeing benefits from reshoring and infrastructure investment.

Even within technology, the beneficiaries are broadening. Semiconductor companies beyond Nvidia—including Broadcom, AMD, and Micron—are capturing share of AI spending. Software companies integrating AI features are seeing improved growth trajectories.

The Russell 2000 Renaissance

Small-cap stocks, as measured by the Russell 2000, hit record highs last week as the "great rotation" takes hold. Smaller companies tend to benefit more from economic resilience and are less exposed to the valuation compression that threatens expensive mega-caps.

Goldman Sachs forecasts 2.6% GDP growth for 2026, supported by consumer spending and potential fiscal tailwinds. This environment historically favors smaller, domestically-focused companies over global mega-caps.

The Investment Playbook for 2026

The slowing Magnificent Seven growth suggests several portfolio considerations:

• Diversify beyond mega-cap tech: The case for equal-weight or small-cap exposure has strengthened as the earnings gap narrows
• Be selective within the Mag Seven: Not all seven will perform equally. Focus on those with continued differentiation and reasonable valuations
• Consider beneficiaries of the broadening: Financials, healthcare, and second-tier tech companies may outperform
• Don't abandon quality: The Magnificent Seven remain exceptional companies—but expectations and valuations need to adjust

The Bull Case Still Exists

It's important not to overstate the case against the Magnificent Seven. Eighteen percent earnings growth remains exceptional by any historical standard. These companies have the balance sheets, talent, and market positions to navigate competitive challenges.

AI is still in early innings, and the Magnificent Seven are best positioned to capture the productivity benefits. Their infrastructure investments today will generate returns for years to come.

But for the first time in years, owning just the Magnificent Seven isn't obviously the right strategy. The market is finally broadening—and investors who've been overexposed to mega-cap tech should consider whether 2026 is the year to rebalance.