Since OpenAI launched ChatGPT, an equal-weight investment in The Magnificent Seven has returned more than 300%. An investor who put $1,000 into each stock on Nov. 30, 2022, would have had about $28,550 at the close of trading on Thursday.
Nvidia is up almost 900%. Microsoft, the weakest member of the group, has roughly doubled in size. Over the same period, the S&P 500 index rose 90.4%. The Nasdaq gained 134.9%.
Despite these staggering returns, investors remain divided over whether the Magnificent Seven represent a classic stock market bubble. The optimistic outlook, provided by Wall Street institutions such as Goldman Sachs and JPMorgan, focuses on healthy earnings, AI infrastructure spending and the ability of these companies to generate cash flow.
“The stakes are high and the visibility of the ultimate winners is limited, but this looks less like a bubble than the tumultuous beginning of a structural transition,” JPMorgan wrote in its 2026 investment outlook.
Count veteran value investor Bill Smead among those on the other side of the bet. The founder and chief investment officer of Smead Capital Management, who announced the launch of a new Canadian subsidiary this month, says it’s a bubble. In fact, it’s colossal. In an interview on Thursday, I asked Smid to compare today’s stock market to the dot-com mania of the late 1990s.
“It’s much more voluminous because interest rates were much lower this time,” he told me.
Indeed, the Bank of Canada kept the overnight rate at 0.25% for two years following the Covid lockdown in March 2020. The US Federal Reserve’s target rate during the same period was 0–25%.
While dot-com stocks became wildly overvalued, the rest of the stock market remained largely unscathed. “About 40% of the market got into this,” Smead said. “The S&P got into this situation because (of technology stocks) dominated, but we didn’t really create problems for the rest of the market.”
The Magnificent Seven make up about a third of the market capitalization of the S&P 500. This is the highest concentration since the Nifty Fifty era of the late 1960s and early 1970s. Because the S&P 500 is weighted by market capitalization, companies like Apple, Nvidia and Alphabet have a huge impact on the index’s performance.
“This rose has already started to bloom,” Smead said.
He thinks investors are missing three things.
First, these companies generate huge profits but spend heavily to maintain their competitive advantage.
Second, the semiconductor business is highly cyclical. There is no guarantee that the current demand for AI infrastructure will continue.
“You’re playing with fire,” Smead said.
Third, there is a potential mismatch between how AI infrastructure investments are accounted for and their true economic productivity.
“People buy their products that will probably only be useful for about a year, and they depreciate them within three years,” Smead said. This is one of the central arguments of AI bears.
Six of the Magnificent Seven companies are major buyers of artificial intelligence infrastructure. Nvidia is primarily a seller of artificial intelligence chips, while Apple is both a buyer and a seller. Buyers are spending hundreds of billions of dollars on AI infrastructure and then amortizing those investments over several years based on management’s estimates of their useful lives.
The main question is whether these estimates are correct. If AI chips become economically obsolete much sooner than expected, reported profits could exceed the underlying economic return on that investment.
Bulls argue that today’s AI infrastructure will continue to provide benefits for years to come as AI adoption increases. The market is betting that they are right.
“Monster” Bogle
Smead argues that the problem goes beyond AI. He says the rise of passive investing has increased the influence of the Magnificent Seven on the broader market.
Wall Street legend John Bogle launched the first retail index mutual fund in 1976, two years after founding The Vanguard Group. Before his death in 2019, Bogle warned that the rapid growth of passive investing could concentrate corporate voting power in the hands of a small number of index fund managers.
“I created a monster,” he said in a 2018 interview with Bloomberg.
Smeed claims that the monster has become even more dangerous.
“Every large institution, every large family office, every financial advisor, every RIA around the world starts their asset allocation by placing 30% of their portfolio in the S&P 500 index,” Smead said.
Many asset managers are recommending passive investing as clients become increasingly concerned about investment fees.
“There has never been a better time to diversify away from popular securities than now,” he said. “Almost every statistic says that in 10 years, if you count dividends, people will have lost money in the S&P 500.”