Inside Markets — Mag 7 Underperformance

The recent underperformance in Mag 7 stocks is likely due to a few factors, including seasonal rotation into YTD laggards. Seasonal rotation may also explain the recent improvement in market breadth. Yesterday ~68% of the S&P 500 (SPX) advanced with the equal weight S&P (SPW) outperforming by 37bp. However, writing off Mag 7 underperformance as a passing seasonal dynamic ignores a new fundamental variable, which is the shift from certain hyperscalers to fund some AI capex through debt issuance rather than free cash flow.  To be clear, the new issuance would only be a drag on sentiment given that Mag 7 net leverage ratios are nowhere near worrisome levels.  For example, GOOGL could issue an additional $60B of debt and its leverage ratio would only be 0.2x – and ratings downgrades aren’t usually considered until a company gets over 1x.  Another fundamental driver of underperformance is earnings growth with Mag 6 companies (ex-NVDA) posting +16% EPS growth in Q3, down from +28% in H1’25.  While +16% earnings growth is still excellent, the deceleration from +28% is undoubtedly impacting the performance of the six companies that have reported.  Aggregate Mag 7 earnings growth in H1’25 was +35%, which makes NVDA earnings print next Wednesday an important card to see.