Magnificent 7 at decade-low valuation premium

Morgan Stanley Wealth Management finds the Magnificent 7 — the largest U.S. megacap tech stocks — are trading with the smallest valuation premium over the S&P 500 in more than ten years. The firm reports the group’s premium has narrowed to about 10%.

Analysts at Morgan Stanley point to heavy debt issuance by these companies to finance AI hardware and to investor doubt about near-term returns from AI projects as drivers of the valuation squeeze. Capital shifted quickly into hardware and semiconductor firms that supply AI infrastructure, reducing the premium investors historically gave to the biggest cloud and platform operators.

Market returns this year reflect that rotation. The S&P 500 is up roughly 9% year-to-date. The Roundhill Mag 7 ETF has edged down while the iShares Semiconductor ETF has risen about 85% over the same period, underlining demand for firms making chips and hardware for AI rather than the companies that financed some of that infrastructure.

Morgan Stanley’s strategists write that the pullback presents an entry point for targeted buying of specific hyperscalers. The firm recommends lowering exposure to semiconductor stocks and reallocating some funds into selected megacap cloud providers in the second half of 2026. The team notes the Magnificent 7 still show roughly a 45% annual earnings growth advantage over the rest of the S&P 500.

Valuation compression is visible at the company level. Nvidia is trading at about 18 times forward earnings, compared with a historical average near 36 times, the report says. Morgan Stanley adds that the gap between Magnificent 7 multiples and other S&P 500 stocks is the narrowest in over a decade.

Lisa Shalett, head of the global investment office at Morgan Stanley Wealth Management, described hyperscalers as “deeply undervalued.” The report expects enterprise demand to move away from resource-heavy “tokenmaxxing” models and toward hybrid AI setups that mix on-premises and cloud processing, a change Morgan Stanley says should benefit major cloud operators including Alphabet, Amazon and Microsoft.

Morgan Stanley also wrote that it will act as stock-pickers within the group, focusing on firms with flexible architecture strategies and custom ASIC racks tied to dominant cloud service businesses. Several other Wall Street firms remain constructive on Magnificent 7 names for the next 12 months, citing earnings trends and their roles in AI deployment.