By Krystal Hur

The Magnificent Seven drove the stock market's bull run. Now, their bruising losses pose a new test for markets.

For the past two years, the group of megasize tech companies -- Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla -- helped fuel a gangbusters rally that lifted stocks out of the 2022 bear market and toward dozens of all-time highs. Investors powered their shares to eye-popping levels, heralding them for their fortresslike balance sheets and their lead in the artificial intelligence race.

Now, even after a rally this past week, the Magnificent Seven are off to their worst start to a year since the 2022 slide, according to Dow Jones Market Data. Each stock has fallen more than 6.5%, and they have collectively lost $2.5 trillion in market value. The Roundhill Magnificent Seven exchange-traded fund just posted its best four-day run ever, notching a 13% climb -- that still left it down about 15% this year.

The stumble comes after the emergence of DeepSeek's AI model in January dented confidence in U.S. tech companies' AI leadership. President Trump's global trade war has threatened the so-called "American exceptionalism" trade, which was rooted in strong U.S. growth prospects and cutting-edge technological advancements. And some members of the group face their own challenges that are weighing on shares as well.

"From Magnificent to Maleficent, it's just become a massive challenge," said Matt Orton, head of market strategy at Raymond James Investment Management, referencing the villain in the "Sleeping Beauty" fairy tale. "Some of the shine has been lost with respect to the story. It was only a matter of time."

Investors will get a fresh look at the Magnificent Seven's prospects in the coming days when Meta, Microsoft, Apple and Amazon report earnings. Nvidia's quarterly results are due in late May.

Traders fretted during the AI-fueled stock rally that the U.S. market was becoming overly dependent on the performance of a relatively small handful of companies. Many warned their boost could just as quickly turn into a major drag. The group represented about 36% of the S&P 500's market value at its peak in December, according to Dow Jones Market Data.

The S&P 500's total return, which includes dividends, is down 5.7% this year. Without the Magnificent Seven, returns would be down just 1.2%, according to S&P Dow Jones Indices data. The tech-heavy Nasdaq Composite Index is in a bear market, having fallen 20% from its recent high, and is still down 10% on the year.

Some investors are concerned that the Magnificent Seven's slump will weigh on major indexes' nascent recovery from the tariff rout.

"When the generals fall, people tend to get nervous," said Katie Stockton, founder and managing partner of Fairlead Strategies.

For one, the group's earnings dominance is expected to diminish. The Magnificent Seven are expected to report a 16% climb in profits in the 2025 calendar year, down from about 37% in 2024, according to analysts polled by FactSet. They project a 7.8% jump in earnings for the other companies in the benchmark index, up from about 5% last year.

The recent turbulence has also sharpened Wall Street's focus on the unique problems each company faces. Tesla said Tuesday that net income dropped 71% in the first quarter, following a slump in automotive sales. The electric-vehicle maker has faced mounting competition and criticism over Chief Executive Elon Musk's role in the Trump administration.

Nvidia's stock tumbled earlier this month after the company warned it would take a $5.5 billion charge due to new China export curbs. Apple is grappling with weak iPhone sales and delays in its rollout of AI enhancements to its Siri voice assistant. Alphabet forecast some pressure on Google's advertising business from changes to the de minimis rule that exempted some goods from tariffs.

Some analysts say the Magnificent Seven's stock valuations still look stretched. Nvidia is trading at 23 times its projected earnings over the next 12 months, below its 31 multiple at the beginning of this year. Meta is trading at a multiple of 21, down from 23 in January. The S&P 500 is trading at 20 times.

Those worries date to when the group was known as FAANG -- Facebook, Amazon, Apple, Netflix and Google. Tech shares plunged in 2022 after the Federal Reserve began raising interest rates, with investors fearful that higher borrowing costs would hamper their ability to generate windfall profits.

Those stocks bounced back in 2023, though the era of FAANG came to an end after Bank of America's Michael Hartnett coined the Magnificent Seven that same year. (The renaming of Facebook-parent Meta and Google-owner Alphabet had also posed problems for the acronym.)

Hartnett, who named the Magnificent Seven after the 1960 film he watched every Christmas as a child, declared them "Lagnificent" in a January note. Still, he expects that the group's competitive advantages and the U.S.'s still-standing financial primacy will eventually lure investors back.

"At the end of the day, nobody wants to own bonds," Hartnett said. "There's only so much gold and European equities or emerging [markets]. And so it's almost by default, you go back to the U.S. equity market."

Write to Krystal Hur at krystal.hur@wsj.com

(END) Dow Jones Newswires

April 26, 2025 21:00 ET (01:00 GMT)

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