When the Philadelphia Semiconductor Index surged 83% this year while the Magnificent Seven stood still, top Wall Street strategists collectively called for a "reshuffle."

When the Philadelphia Semiconductor Index surged 83% this year while the Magnificent Seven stood still, top Wall Street strategists collectively called for a "reshuffle."

The group of U.S. tech giants known as the "Tech Seven Giants" have made almost no progress this year, and are becoming the biggest obstacle for Wall Street in achieving year-end targets.

During the first half of this year, the Wind Tech Seven Giants Index experienced wide fluctuations and ultimately ended up flat at its early-year price, while the S&P 500 index rose by 9.3% over the same period. The gap between the two is nearly 10 percentage points, marking the second-worst start ever for this group in terms of relative performance to the broader market.

While the AI boom continues to drive semiconductor and other tech stocks significantly higher, this giant group, which accounts for about one-third of the S&P 500's weighting, clearly lags behind, putting pressure on Wall Street strategists' year-end forecasts.

Major institutional strategists have a consensus year-end target for the S&P 500 at 7824.09 points, implying about 5% upside from Wednesday's closing price. According to Bloomberg estimates, if the Tech Seven Giants continue to underperform, the other 493 constituent stocks would need to rise another 6.8% on top of an already cumulative 13% increase this year for the target to be met.

Semiconductors Steal the Spotlight, Seven Giants Become "Outsiders"

The Tech Seven Giants, who dominated the market for nearly a decade, have lost their shine this year, as capital flows toward direct beneficiaries of AI infrastructure—chip stocks. The Philadelphia Semiconductor Index has surged 83% year-to-date.

The Tech Seven Giants as a whole have underperformed more than 300 S&P 500 constituents, including smaller companies like Dollar Tree and Hubbell.

Ken Mahoney, CEO of Mahoney Asset Management, pointed out that Meta, Amazon, and Microsoft—among the Tech Seven Giants—have been the main financial sources for AI infrastructure construction. He said:

The market is not buying into the idea that they're pouring tons of free cash flow into AI without any clear indication of when investment returns will be seen.

As pressure to hit year-end targets increases, Morgan Stanley, Goldman Sachs, and JPMorgan have all recently stated in the past two weeks that the underperformance of the Tech Seven Giants relative to chip stocks and the broader market has become excessive.

Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management, wrote in a research report on Tuesday that the semiconductor sector is "severely overbought" and now it's time to revisit the potential opportunities among the Tech Seven Giants. She stated:

The acceleration of order backlogs and expanding pricing power among semiconductor manufacturers and memory suppliers is notable, but we believe this trend is unsustainable.

Lisa Shalett did not predict the end of the current cycle, but called for a diversified allocation to potential beneficiaries of AI infrastructure, to "re-embrace some of the mega-scale cloud service providers."

Alonso Munoz, CIO of Hamilton Capital Partners, stated:

From this position, the S&P 500 will find it difficult to move forward without participation from the Tech Seven Giants, since many sectors that have already surged, like energy, are also facing correction pressure. These names have a decisive impact on the index's movements.

Valuation Returns to Historical Low Premium, Reallocation Appeal Emerges

Continued adjustment in the Tech Seven Giants this year has resulted in significant improvement in their valuations. According to Bloomberg data, the group's P/E ratio has dropped from 32.6 at the end of October last year to 23.9 times currently. Last month, the valuation premium of the Tech Seven Giants relative to the S&P 500 narrowed to just 2.4 times, near the historical lowest level.

Rich Privorotsky, a Goldman Sachs partner, is highly optimistic about the outlook for artificial intelligence but is "far from convinced" about the current direction of market bets on the value chain.

He believes that once scarcity disappears, holding AI platforms will be more advantageous than holding hardware. In his words, mega-scale cloud service providers "own the toll road itself, not just the cars running on it."

Some market participants believe the S&P 500 can achieve its year-end target even without a rebound from the Tech Seven Giants.

Sameer Samana, Head of Global Equities and Real Assets at Wells Fargo Investment Institute, noted that, excluding the Seven Giants, the other S&P 500 constituents have already risen about 14% year-to-date and may be able to reach the target relying on other stocks.

Melissa Brown, Director of Investment Decision Research at SimCorp, also said the S&P 500 "may be able to reach" the 7824.09 point year-end target relying on the other constituents. Melissa Brown added:

But considering these stocks have lower weighting, they need to rise by a larger margin to lift the overall index to that level.

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