Investors Grow Tired of AI Euphoria, Shift Cash from Mag 7 Stocks to Alternative Investments in 2024

• What's Driving the Great Rotation Away from AI Stocks?
• How Are Alternative Investments Benefiting?
• What Does History Say About Market Leadership Changes?
• Are the Mag 7 Really Finished?
• What Triggered the AI Pullback?
• Frequently Asked Questions

After three years of dominance by the so-called "Magnificent Seven" tech giants riding the AI wave, investors are finally showing signs of fatigue. Money is flowing out of these high-flying stocks into more defensive sectors, marking what could be a significant market inflection point. While AI-powered companies like Nvidia and Microsoft added trillions in market value since ChatGPT's 2022 debut, recent months show cracks in the narrative as skepticism grows about AI's actual economic impact.

What's Driving the Great Rotation Away from AI Stocks?

The shift started subtly after the S&P 500 peaked in late October 2023. From October 29 through early January 2024, the Mag 7 stocks collectively fell 2% while the other 493 S&P 500 companies gained 1.8%. "I call it 'AI fatigue'," says Ed Yardeni of Yardeni Research. "I'm tired of it, and suspect many others are growing wary of the whole AI story."

This rotation reflects growing doubts about whether AI can deliver the transformative profits its proponents promise. Investors are moving capital into cheaper, less volatile sectors - financials like JPMorgan Chase, consumer stocks like Nike, and value plays across the broader market.

How Are Alternative Investments Benefiting?

The DefiLarge Cap Ex-Magnificent Seven ETF (XMAG) tells the story. Launched in late 2023, it attracted six straight months of inflows through year-end, with December investments quadrupling November's. The fund returned 15% in 2023, mostly in the second half.

"The S&P 493's performance has been impressive," notes Yardeni. These companies maintained strong profit margins despite political uncertainty, potential TRUMP tariffs, and labor market softening. If the economy improves, cyclical and growth-oriented sectors could shine brighter than tech behemoths.

What Does History Say About Market Leadership Changes?

Past transitions haven't been smooth. "The most benign scenario WOULD be peaceful power transfer to the other 493 S&P components," says Doug Peta of BCA Research. "But that's not how powerful, concentrated bull markets typically evolve."

While Peta believes AI still has room to grow, investors are becoming selective. Early AI darlings like Oracle have suffered significant losses as the market differentiates between real AI players and HYPE vehicles.

Are the Mag 7 Really Finished?

Not necessarily. "I don't believe the Mag 7's reign is ending - I'd be surprised if they don't make one last push," Peta cautions. However, Goldman Sachs predicts their contribution to S&P 500 earnings growth will dip from 50% in 2025 to 46% in 2026 as the rest of the index gains momentum.

The S&P 493 now looks attractive to value investors, with Goldman strategists noting significant valuation gaps versus fundamentals. Combined with reasonable economic prospects, this bodes well for value stocks.

What Triggered the AI Pullback?

Yardeni traces it to Michael Burry's cryptic October 2023 warning (the "Big Short" investor later revealed short positions in Nvidia and Palantir). The timing aligns with when the Mag 7 peaked and the rotation began.

This doesn't mean AI is dead - far from it. But after the initial frenzy, markets are entering a more discerning phase where real AI applications will be rewarded and hype punished. As always in investing, what goes up must eventually consolidate or correct.

Frequently Asked Questions

What are the Magnificent Seven stocks?

The Mag 7 refers to seven tech giants that dominated markets: Nvidia, Microsoft, Apple, Alphabet (Google), Meta (Facebook), Broadcom, and Oracle.

Why are investors moving away from AI stocks now?

Three factors: 1) Valuation concerns after massive rallies 2) Growing skepticism about near-term AI profitability 3) Better opportunities in overlooked sectors.

What's the best alternative to Mag 7 stocks?

Funds like XMAG that exclude the Mag 7, or sectors like financials (JPMorgan), consumer discretionary (Nike), and industrial cyclicals.

Will AI stocks recover their leadership?

Likely not to the same degree. While AI remains transformative, the initial euphoric phase has passed as markets mature.

How much did the Mag 7 underperform recently?

From 10/29/23-1/8/24: Mag 7 down 2%, S&P 493 up 1.8%.