Magnificent Seven Valuations Drop Below 25x as Correlation with S&P Turns Negative
On Feb. 23 the correlation between the Magnificent Seven and the equal-weighted S&P 500 turned negative after the group declined 7.3% since late-October while the equal-weight gained 8.9%. Valuations have reset to below 25x estimated earnings from nearly 33x in October, with 2026 earnings growth forecast at 19% versus 14%.
1. Correlation Shift and Market Divergence
On Feb. 23 the correlation coefficient between the Magnificent Seven and the equal-weighted S&P 500 slipped below zero, marking a reversal from three years of tight alignment. This divergence followed a 7.3% drop in the group from late October to February while the equal-weighted S&P 500 climbed 8.9%.
2. Valuation Reset Across Big Tech
Valuations for the Magnificent Seven have fallen from nearly 33 times estimated earnings in October to below 25 times today, dipping beneath their long-term average. This reset reflects waning investor enthusiasm amid geopolitical tensions and sector underperformance.
3. Earnings Growth Outlook
Analysts still forecast 19% earnings growth for the Magnificent Seven in 2026 versus 14% for the broader S&P 500. Nvidia, as the group’s largest component, remains a key driver of these projections based on AI-related revenue expectations.
4. Key Risks to Sustained Leadership
Heavy capital spending on AI infrastructure is pressuring free cash flow for hyperscalers, and investors are questioning whether current growth assumptions for Nvidia’s AI demand are becoming stretched. Renewed market leadership depends on stabilization of macro factors and consistent earnings delivery.