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 about $28,550 as of Thursday’s close.
Nvidia is up nearly 900%. Microsoft, the weakest-performing member of the group, has roughly doubled. Over the same period, the S&P 500 Index is up 90.4%. The Nasdaq has gained 134.9%.
Despite those eye-watering returns, investors remain divided over whether the Magnificent Seven represents a classic stock-market bubble. The bullish case, made by Wall Street institutions like Goldman Sachs and JPMorgan, focuses on healthy earnings, AI infrastructure spending and these companies’ ability to generate cash flow.
“The stakes are high, and visibility into the ultimate winners limited, but this looks less like a bubble and more like the tumultuous beginnings of a structural transition,” wrote JPMorgan 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 is a bubble. In fact, it’s a whopper. In an interview on Thursday, I asked Smead to compare today’s stock market with the late-1990s dot-com mania.
“It is massively more voluminous because the interest rates started out much lower this time,” he told me.
Indeed, the Bank of Canada held its overnight rate at 0.25% for two years following the Covid pandemic lockdowns in March 2020. The U.S. Federal Reserve’s target rate was 0–25% during the same period.
While dot-com stocks became heavily overvalued, the rest of the stock market remained largely unaffected. “Like 40% of the market got caught in it,” Smead said. “The S&P got caught in it because of the [technology stocks’] dominance, but we really didn’t get the rest of the market in trouble.”
The Magnificent Seven make up about one-third of the S&P 500’s market capitalization. That is the highest concentration since the Nifty Fifty era in the late 1960s and early 1970s. Because the S&P 500 is market-cap weighted, companies like Apple, Nvidia and Alphabet have an outsized impact on the index’s performance.
“The bloom has already started coming off that rose,” Smead said.
He believes investors are missing three things.
First, these companies are generating enormous profits, but they’re spending 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 persist.
“You’re playing with fire,” Smead said.
Third, there is a potential mismatch between how AI infrastructure investments are being accounted for and their true economic productivity.
“People are buying their products, which are probably only going to be useful for about a year, and they’re depreciating them over three years,” Smead said. This is one of the central arguments made by AI bears.
Six of the Magnificent Seven companies are major buyers of AI infrastructure. Nvidia is primarily a seller of AI chips, while Apple is both a buyer and seller. The buyers are spending hundreds of billions of dollars on AI infrastructure, then depreciating those investments over several years based on management’s estimates of their useful lives.
The critical question is whether those estimates are correct. If AI chips become economically obsolete much sooner than expected, reported profits could overstate the underlying economic returns on those investments.
Bulls argue that today’s AI infrastructure will continue generating value for years as AI adoption expands. The market is betting they’re right.
Bogle’s ‘monster’
Smead argues the problem extends beyond AI. He says the rise of passive investing has amplified the Magnificent Seven’s influence over 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’ve created a monster,” he said in a 2018 interview with Bloomberg.
Smead argues the monster has grown even more dangerous.
“Every major institution, every major family office, every financial advisor, every RIA around the world starts their asset allocation by stuffing 30% of their portfolio in the S&P 500 Index,” Smead said.
Many wealth managers recommend passive investments because clients have become increasingly concerned about investment fees.
“There’s never been a single time better to be diversified away from popular securities than right now,” he said. “Almost every statistical measure would say that 10 years from now, counting dividends, people will lose money in the S&P 500.”
