The "core logic" of the continuous decline in US stocks: the downfall of the "maximum weight" Mag 7.

The once most crowded trade of the Mag 7 is now becoming a big burden dragging down the US stock market. The Mag 7 collectively stumbled this month, with the seven stocks each falling between 3% and 8% in a single week, while the Nasdaq index dropped by about 4% for the week. At the same time, the Dow Jones and Russell 2000 small-cap index both outperformed. This marks the worst week for the Nasdaq index compared to small-cap stocks since July 2024. The logic behind this differentiation is straightforward: the Mag 7 accounts for over 30% of the total market value of the S&P 500. When over 30% of the market value in an index falls by more than 5% in a single week, the remaining component stocks are simply unable to make up for it. This is why, even though 8 out of the 11 major industry sectors closed higher for the week, the overall market index still declined. This month, the total market value of the Mag 7 evaporated by about $3 trillion. The Roundhill Magnificent Seven ETF, which tracks these seven stocks, fell by 13% in June, making it the worst monthly performance for the fund since its inception in April 2023, according to Dow Jones market data. In comparison, the Defiance Large Cap ex-Mag 7 ETF, which tracks the remaining components of the S&P 500, rose by 2.6% during the same period. Despite the positive macroeconomic factors this week that should have boosted risk assets, the Mag 7 continued to face pressure. The reason for this is not a macro problem, but a structural issue. The backlash of crowded trades: leaders turning into laggards The plight of the Mag 7 is essentially the result of a "loosening crowded trade." For the past three years, "going long on the Mag 7" was the most crowded trade in the market. Bank of America analyst Michael Hartnett coined the term "Mag 7" in 2023, when these seven stocks led investors out of the bear market of 2022 and continued to outperform the S&P 500 until 2025. But in 2026, the market's favorite changed. Upstream chip and hardware suppliers in the AI industry chain emerged strongly. According to data from the financial software company Hazeltree, after storage chip maker Micron Technology released impressive financial reports, its market value is now close to Meta's; chip equipment maker Applied Materials and semiconductor giant Broadcom, became the second and third most crowded long positions for hedge funds last month. Empower's chief investment strategist Marta Norton told Barron's, "In the backdrop of skyrocketing chip stocks and continued weakness in software stocks, the stock market seems to have completely forgotten about the Mag 7." There is a clear differentiation within the AI ecosystem the "AI payers" (super-scale cloud computing companies) and the "AI receivers" (chip and computing power suppliers) have diverged significantly, with non-AI sectors rising by 2.2% for the week. Each company has its "troubles" The decline of the Mag 7 is not a one-size-fits-all situation, as each company has its own pressure points. According to Barron's, Amazon, Meta, Microsoft, and Alphabet are pouring significant amounts of money into AI infrastructure development; Nvidia faces new chip competition; Apple is facing pressure from rising memory prices; and Tesla continues to experience significant volatility. In Musk's business empire, Tesla is no longer the largest listed company in terms of market value. The record-breaking IPO of SpaceX two weeks ago has also diverted market attention. Kimberly Forrest, chief investment officer of Bokeh Capital Partners, said that the Mag 7 are still giant companies that are able to make "a lot of cash," but now they also have "grand troubles." Behind the valuation discounts: it's no longer 2023 The relative discount of the Mag 7 has its fundamental logic. The forward valuation multiples of some of the Mag 7 stocks are currently close to the overall level of the S&P 500, but this does not necessarily mean they are cheapmeasured by price-to-sales ratio, the current valuations of these companies are still as high as 11 times historical sales, far above the levels corresponding to the P/E of about 47 times during the heyday of the "Nifty Fifty" in the 1970s. Spencer Jakab, a columnist for the Wall Street Journal, made a historical comparison. The "Nifty Fifty" of the 1970s was also the most crowded "one-decision" stocks at the time, and in 2023 and 2024, the Mag 7 contributed to over half of the S&P 500's gains. However, after the "Nifty Fifty" significantly underperformed the market in the mid-1970s, it wasn't until 1997 that they fully recoveredtaking a whole 25 years. Jakab wrote, "Sentiment overwhelms valuation in the short term." He also used Cisco as an example: Cisco became the largest company in the world by market value in 2000, with an outstanding CEO, market dominance, and sustained sales growth, but its stock price didn't return to its peak until last year25 years later. His conclusion is, "There's no such thing as a 'one-decision' stock." Unusual volatility: QQQ is only 5% away from the high, but market behavior is like a "stress test" From a technical perspective, the current volatility signals are quite abnormal. According to SpotGamma's analysis, the QQQ (Invesco Nasdaq 100 Index ETF) is only about 5% away from its historical high, but the performance of implied volatility is approaching the level when tensions escalated in Iran in March this year. This round of volatility is not triggered by a market crash, but rather by several violent reversals after rapid price increases from May to June. There is a significant divergence between the "VIX" of the Nasdaq and the "VIX" of the S&P 500. According to Bloomberg analyst Michael Ball, options and leveraged ETFs are turning the S&P 500 into a "two-way volatility machine"hedging and rebalancing funds are accelerating directional market volatility rather than dampening it. The current sell-off is more like a "concentration of unwinding crowded positions," rather than a comprehensive macro derisking. The selling funds from AI leaders are flowing into value stocks, quality stocks, and the previously stagnant super-scale cloud computing companies and software stocks. Mag 7 is "turning red" in the bond market, but stock investors may not necessarily follow suit Interestingly, while the Mag 7 are falling out of favor in the stock market, they are gaining popularity in the bond market. AI cloud computing giants like Google, Microsoft, Meta, and Amazon have started issuing tens of billions of dollars in bonds to purchase chips and build data centers. Marta Norton stated that the Mag 7 has become the "darling" of the fixed income market. But that doesn't mean stock investors should switch to corporate bonds. Barron's pointed out that the forward valuations of some of the Mag 7 stocks are now approaching the overall level of the S&P 500, making them somewhat attractive. The core issue is that this is no longer 2023 back then, these companies were experiencing rapid growth, with little capital expenditure and no questions regarding competition. According to Goldman Sachs analyst Ben Snider, investors need to strike a balance between "stronger-than-expected AI capital spending," the risks of "potential spending slowdown," and the uncertainty of "whether recent earnings power can be sustained." This article is reprinted from"Wall Street See News," author: Long Yue, GMTEight Editor: Zhang Jinliang.