The "core logic" behind the continuous decline of US stocks: The "largest-weight" Magnificent 7 have fallen.

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What was once the most crowded long trade is now becoming a heavy burden dragging down U.S. stocks.

The Mag 7 collectively lost momentum this month, with each of the seven stocks dropping between 3% and 8% in a single week, while the Nasdaq fell about 4% that week. Meanwhile, the Dow and Russell 2000 outperformed. Thiswas the worst week for the Nasdaq relative to small-cap stocks since July 2024.

The logic behind this divergence is straightforward: Mag 7 accounts for over 30% of the S&P 500’s total market cap. When more than 30% of the index's market cap drops over 5% in a single week, the rest of the components simply can't make up for it. That’s why, even though 8 out of 11 major sectors closed higher for the week, the broad market index still declined.

This month, the Mag 7’s total market value evaporated by about $3 trillion. The Roundhill Magnificent Seven ETF tracking these stocks dropped 13% in June, which according to Dow Jones market data, will be its worst monthly performance since its launch in April 2023. In contrast, the Defiance Large Cap ex-Mag 7 ETF tracking the rest of the S&P 500 components rose 2.6% over the same period.

Macro tailwinds "fail to work": Why is Mag 7 dropping?

This week’s macro data should, in theory, boost risk assets.

Goldman Sachs strategist Chris Hussey analyzed that at least five positive factors appeared this week: reopening of the Strait of Hormuz; oil prices fell about 10% in a week; May core PCE inflation rose 0.32% month-on-month, in line with expectations; Micron posted strong earnings, with a stock surge of more than 4% against the trend; 10-year US Treasury yields fell over 10 basis points to 4.37%, traditionally supporting stock valuations; Goldman’s chief economist Jan Hatzius reaffirmed the Fed will not cut rates this year.

Yet, the VIX hovered around 20 all week, with Mag 7 under continued pressure.

The reason is, it’s not a macro issue—it’s structural.

Blowback from crowded trades: Leaders become laggards

The Mag 7’s predicament is essentially a result of “crowded trades unwinding.”

For the past three years, “going long Mag 7” was the market’s most crowded trade. Bank of America’s Michael Hartnett coined “Mag 7” in 2023, at which time these seven stocks led investors out of the 2022 bear market and continuously outperformed the S&P 500 until 2025.

But in 2026, market favorites changed.

Upstream players in the AI industrial chain—chip and hardware suppliers—rose strongly. According to Hazeltree financial software, memory chip maker Micron’s market value after its stellar earnings report is approaching Meta; Applied Materials and semiconductor giant Broadcom last month ranked as the second and third most crowded long positions among hedge funds.

Empower chief investment strategist Marta Norton told Barron’s: “In the context of historic chip stock surges and persistent software weakness, it seems the stock market has completely forgotten about Mag 7.”

Within the AI ecosystem, a clear divergence has emerged—"AI payers" (the hyperscale cloud firms) versus "AI earners" (chip and computing power suppliers) moving increasingly apart. Non-AI sectors rose 2.2% for the week.

Every company has its own “issues”

The decline of Mag 7 is not monolithic; each company has its own pressure points.

According to Barron’s, Amazon, Meta, Microsoft, and Alphabet are pouring massive amounts into AI infrastructure; Nvidia faces a new round of chip competition; Apple is pressured by rising memory prices; Tesla remains as volatile as ever.

In Elon Musk’s business empire, Tesla is even no longer his largest publicly listed company. SpaceX’s record-breaking IPO two weeks ago has also diverted market attention.

Bokeh Capital Partners CIO Kimberly Forrest said, the Mag 7 are still “cash machines,” but now “they’ve got ‘grand-scale troubles’ too.”

Valuation discount: It’s not 2023 anymore

The relative discount of Mag 7 has some fundamentals behind it.

Some Mag 7 stocks’ forward multiples have only a thin premium to the S&P 500 now. But that doesn’t mean they’re cheap—measured by price-to-sales, these companies’ valuations are still 11 times historic sales, far above the “Nifty Fifty” peak period (about 47 times PE) in the 1970s.

Wall Street Journal columnist Spencer Jakab used history for a comparison: the “Nifty Fifty” of the 1970s were also the market’s most crowded “one-click decision” stocks, and in 2023-24, Mag 7 contributed over half of the S&P 500's gains. But after “Nifty Fifty” underperformed massively in the mid-70s, it took until 1997 to reclaim lost ground—a full 25 years.

Jakab wrote, “Emotion trumps valuation in the short term.” He cited Cisco as an example: Cisco became the world’s largest company in 2000, with a great CEO, dominant market share, and sustained sales growth, but its share price only returned to peak last year—a quarter century later.

His conclusion: “There’s no such thing as a ‘one-click decision’ stock.”

Abnormal volatility: QQQ is only 5% off its peak, but the market acts like it's in 'stress test'

From a technical perspective, the current volatility signal is quite abnormal.

According to SpotGamma analysis, QQQ (Invesco Nasdaq 100 ETF) is only about 5% off its all-time high, but implied volatility is at levels seen during the initial March Iran conflict escalation. This volatility wasn’t triggered by a market crash, but by a rapid surge in stock prices from May to June, followed by several sharp reversals within June.

There’s a notable gap between Nasdaq’s “VIX” and S&P 500’s “VIX,” with the former far higher.

Bloomberg analyst Michael Ball observes that options and leveraged ETFs are turning the S&P 500 into a “two-way volatility machine”—hedging and rebalancing flows are speeding up rather than dampening directional swings.

The current sell-off is more like “crowded position flush-outs,” rather than a broad macro risk-off. The funds selling AI leaders are flowing to value and quality stocks—as well as previously lagging hyperscale cloud firms and software stocks.

Mag 7 are “winning” in the bond market, but stock investors may not follow

Interestingly, Mag 7 is losing favor in the equity market but gaining in bonds.

AI cloud computing giants like Google, Microsoft, Meta, and Amazon have started issuing hundreds of billions in bonds to buy chips and build data centers. Marta Norton said Mag 7 are now the “new darlings” of the fixed income market.

But that doesn’t mean stock investors should switch to company bonds. Barron’s points out that some Mag 7 stocks’ forward valuations are close to the S&P 500 as a whole, offering some appeal.

The core issue is, it’s no longer 2023—that was when these companies were growing quickly, with little doubt about capital expenditures or competition. According to Goldman analyst Ben Snider, investors need to balance “stronger-than-expected AI capex” versus “the risk of a potential slowdown in spending” and “uncertainty over whether recent profitability can be sustained.”

Risk Warning and DisclaimerThe market is risky, investment needs to be cautious. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their particular circumstances. Investment decisions are made at your own risk. ```