The S&P 500 has become a lopsided index, with the Magnificent Seven significantly increasing risk exposure for investors, according to Apollo chief economist Torsten Sløk. As the paths of the Magnificent Seven begin to diverge and the AI bubble swells, Sløk argues it’s time to begin questioning which AI companies to invest in.
It’s time to question the soundness of continued zealous investment in the Magnificent Seven, one top economist warns.
The S&P 500 has become “extremely concentrated,” with the top 10 stocks contributing 54% of market returns since January 2021, Apollo chief economist Torsten Sløk said in a Friday blog post. With the cluster of tech stocks at the top beginning to unravel, he is pouring cold water on continued aggressive investment in the index and in the Magnificent Seven.
“The textbook idea that the S&P 500 gives you a diversified exposure to risk is just simply no longer the case,” Sløk told Fortune. “You are very focused and concentrated in a small group of names, in particular in tech, making up such a significant share of your overall risk exposure.”
The top 10 companies in the S&P 500 now prop up 40% of the index’s market capitalization—more than 30% of which is from the Mag Seven—meaning the fortune of the markets has become increasingly reliant on investor optimism about AI. Alphabet’s AI rally not only helped mint CEO Sundar Pichai as a billionaire, for example, but the Google parent’s earnings beat gave the S&P 500 its fourth consecutive record close on Thursday.
But as the AI bubble swells larger than the IT bubble a quarter-century ago, as Sløk has previously noted, the extreme hype around the technology risks creating even broader economic consequences than the dotcom crisis. To protect one’s individual investments, now is the time to reconsider pouring money into the Mag Seven, Sløk argued.
“One should have some exposure to the S&P 500 and should certainly also have some exposure to AI,” Sløk said. “But it’s very clear that [owing to] the market’s extreme focus and concentration on this story, this is the time to have a conversation around, What are the things I should be doing with my money?”
Mounting concerns over the ramifications of a growing AI bubble coincide with the unraveling of the Magnificent Seven stocks.
“We’re beginning to have conversations about the ‘Magnificent Six,’ maybe it’s only five,” Sløk said. “This is also just telling you that the Magnificent Seven are seven very, very different companies that have very different businesses.”
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