Are Funds About To Offload The Magnificent 7

Growing unease over valuations in parts of the US technology sector is prompting some of the world’s largest asset managers to reassess their exposure, with a number preparing portfolios for what they see as an increasingly likely correction.

After another strong year for the biggest American technology groups, concerns are mounting that enthusiasm around artificial intelligence has driven prices beyond levels justified by underlying earnings. Several fund managers now describe conditions as stretched, with some opting to cut holdings outright while others are turning to derivatives to protect against a downturn.

Vincent Mortier, chief investment officer at Amundi, Europe’s largest asset manager with €2.3tn under management, said the question was no longer whether excesses exist, but how and when they might unwind. Rather than exiting equities wholesale, Amundi has increased its use of hedging strategies designed to benefit if markets fall.

Mortier said this approach offered protection without forcing the firm to abandon long-term holdings entirely. Selling aggressively, he added, risked missing further gains if markets continued to climb before any correction took place.

The reassessment comes as the largest US technology companies continue to dominate market performance. The so-called Magnificent Seven, comprising Nvidia, Meta, Tesla, Apple, Microsoft, Amazon and Alphabet, rose by roughly 21 per cent last year, extending a multi-year rally that has increasingly concentrated returns in a small number of stocks.

Valuations for some of these companies remain elevated. Nvidia, which has been a central beneficiary of demand for AI chips, trades at around 46 times earnings, even after pulling back from recent highs. Apple, the world’s most valuable listed company, is valued at roughly 37 times earnings, a level that some investors believe leaves little margin for disappointment.

At Blue Whale Capital, manager of the £1.7bn Blue Whale Growth fund, concerns over valuation and returns led to a decisive shift last year. The fund exited positions in both Microsoft and Meta during the second quarter, marking a notable change in strategy.

Stephen Yiu, Blue Whale’s chief investment officer, said selling Microsoft was a particularly difficult call given the firm had held the stock since the fund launched more than eight years ago. While he stopped short of declaring a full-blown bubble, Yiu said the expected return on capital for some AI investments no longer justified the prices being paid.

He added that valuations in private markets appeared even more extreme, reflecting fierce competition among investors to back AI-focused companies. Blue Whale now holds only Nvidia among the Magnificent Seven, reflecting its view that chipmakers are better positioned to monetise AI spending than many end-users.

Warnings about excess risk are not limited to asset managers. Institutions including the International Monetary Fund, the Bank for International Settlements, the Bank of England and the European Central Bank have all raised concerns over asset valuations and market concentration in recent months.

Despite these cautions, investor behaviour remains largely bullish. A recent survey by Bank of America showed global fund managers holding near-record low levels of cash, a signal that many expect markets to keep rising. At the same time, fears of an AI-driven bubble were cited as the single biggest risk facing markets.

Some firms have taken a more radical stance. Rajiv Jain, chair and chief investment officer at GQG Partners, which manages more than $166bn, said the group had fully exited its remaining Magnificent Seven holdings by early November.

Jain argued that the pace of spending on AI infrastructure far exceeded the revenues currently being generated. He estimated that AI-related revenues remain below $25bn globally, while capital expenditure continues to rise sharply. In his view, startups are unlikely to generate sufficient demand to sustain the scale of investment being made by large cloud providers.

He also flagged what he described as increasingly aggressive accounting practices and capital allocation decisions, warning that these were reminiscent of behaviours seen during the dotcom boom. This time, he said, the scale of investment made the risks even larger.

Other managers are adjusting exposure rather than abandoning the sector. Maya Bhandari, Emea chief investment officer for multi-asset at Neuberger Berman, said the firm is gradually diversifying away from US-centric technology exposure and increasing allocations to regions where AI can be accessed at lower valuations.

She pointed to opportunities in China and emerging Asian markets, as well as in countries such as South Korea, where semiconductor supply chains offer indirect exposure to AI growth. Neuberger Berman continues to hold US AI stocks, but is balancing that exposure more carefully across regions.

Not everyone agrees that a reckoning is imminent. Some investors argue that comparisons with the dotcom era overlook key differences in today’s technology leaders. Tim Murray, a capital markets strategist at T Rowe Price, said the companies driving the AI boom are already profitable and generate substantial cash flows.

He added that balance sheets remain strong, debt levels are relatively low and credit markets show little sign of stress. In that context, T Rowe Price is not recommending that clients cut AI exposure or employ large-scale hedging strategies.

Helen Jewell, international chief investment officer for fundamental equities at BlackRock, echoed a more measured view. While she said the firm does not believe markets are in a classic bubble, she warned that investors should be prepared for increased volatility.

Rapid advances in AI, shifting expectations around earnings and heightened geopolitical risks could all contribute to sharper market swings over the coming year, Jewell said. Even without a collapse, returns may be less smooth than investors have become accustomed to.

As fund managers weigh these competing narratives, few appear willing to ignore the risks altogether. Whether through selective selling, diversification or derivatives, a growing number are positioning portfolios defensively, even as markets continue to grind higher.

The challenge, as several investors acknowledge, lies in timing. Exiting too early risks missing further gains, while waiting too long could leave portfolios exposed if sentiment turns abruptly. For now, many are choosing a middle path, staying invested but increasingly alert to the possibility that the US technology rally may not continue unchecked.