Is it time to sell the Mag 7?

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest.

There’s no two ways about it - it’s a tricky time to be in the Mag 7. Stellar earnings just don’t hit like they used to, tariff fears are setting in and AI enthusiasm isn’t so much waning as waiting for whatever the theme brings next.

Throw in a forward price-to-earnings multiple (P/E) of 27x vs 20x for the S&P 500 ex-Mag 7, the fact the market capitalisation of the bunch now accounts for around 30% of the US index and uncertainty over their future growth rates, and it’s maybe not surprising to see signs of investors looking beyond the market leaders of the past few years.

While the conversation may not be about jumping ship just yet, there is increasing interest in hedging against the concentration risk of Mag-7 exposure. At an event this week, ETF provider Amundi showed a marked uptick in European ETF appetite heading into 2025, just as the taste for US ETFs faded, albeit from a great height.

Paralleling that move is the performance divide on either side of the Atlantic so far in 2025. In the year to date, the Euronext 100 has returned 8.8% against the -1.4% of the S&P 500 and -3% of the tech-heavy NASDAQ 100. Even the beleaguered FTSE 100 has returned 6.3%.

So, is it time to rotate away from the Mag 7 and how are investors thinking about doing it?

First, it’s worth remembering how we got here.

The tech behemoths do carry around punchy valuations but, arguably, they’ve earned them. Tesla’s maybe a beast of its own in this regard but, broadly, US tech earnings have outstripped the market since the global financial crisis and over the past decade in particular.

While these earnings aren’t expected to plummet, they might be more likely to moderate rather than repeat the performance of the past 12 months, and start to converge with the other S&P 493.

That’s ‘if’ the AI narrative stalls or gets stuck in the wait and see-ness of tariff rollouts. So, investors might feel they need to do a bit of exposure moderation themselves, rather than an outright rotation out of the US.

With this in mind, what are some diversification options on offer?

Mid caps usually trade at a premium to large cap peers as they tend to carry faster growth rates - not so over the past few years. Investors now get a discount of around 4.6 multiple points for the Russell Mid Cap Index, according to Artisan Partners, which rivals the discount to US large caps last seen in the early 2000s.

More broadly, Goldman Sachs points out that US mid caps (S&P 400) racked up a compound annual growth rate greater than the S&P 500 and the small-cap Russell 2000 from 1985 to the end of 2024. With mid-sized companies now expected to grow their earnings faster than large cap stocks, investors might want to take a step down the cap scale.

Another idea for investors who still want US exposure but want to manage their Mag-7 holdings could be the likes of an equal-weighted index exchange-traded fund (ETF). Given the dominance of the tech giants in market-weighted indices, when they sneeze the whole index catches a cold. Reducing that influence by levelling out each constituent’s weight means you still get access to the biggest names but they won’t swing the portfolio quite as much as they would have, in either direction.

Equal-weight funds are often rebalanced quarterly, selling what has gone up enough to knock the balance off, and buying relative underperformers. This type of anti-momentum strategy might not be attractive to everyone. Instead, pairing up an ex-mega cap ETF with a mega cap ETF follows a similar idea but also allows you to dial your mega-cap exposure up and down as you see fit - staying exposed to the Mag-7 but on your terms. Then there is what we’ve seen with European ETF flows. Investors might choose to still keep their US exposure but bring new money into different, cheaper markets.

In the end, you might not actually want to change tack at all. This doesn’t have to be a binary call but recent interest in the likes of Europe raises the point that there is more outside the US at a lower valuation. If the start of 2025 is anything to go by, geopolitics will play its hand in market dynamics this year. And, if the manner of the politics so far is another guide, we simply can’t tell with any great certainty how it will pan out. Preparing for bumps along the way means spreading risk, and these might just be a few ways to start thinking about it.

Discrete calendar year performance

As at 4 March 2025. Source: FE Fundinfo. Total return basis, in local currency. Past performance is not a reliable guide to future results.

Sources:

• Amundi
• Artisan Partners
• Goldman Sachs

Important information

When you invest your capital is at risk. Past performance is not a reliable guide to future gains. Your investments and the income you receive from them may go down as well as up so you may get back less than you invest.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.