Morgan Stanley’s chief investment officer warns that the Magnificent 7’s era of dominance may be coming to a close.
In a new interview on The Meb Faber Show, Mike Wilson says one macro trend emerging is diversification, noting that investors are de-risking and de-concentrating from the US and mega-cap tech names.
He also notes that while the Mag 7 stocks have outperformed over the past few years, it would be foolish to assume that the trend will persist amid the massive AI CapEx cycle.
“This idea of just going back to the tried-and-tested Mag 7, I think, is a mistake. And there are fundamental reasons for that, too. We can talk about that, like how this is similar to the 1990s. I was a tech investor back in the ’90s, and so I saw the boom and the bust. And I would say where it’s very similar is that we have this CapEx cycle that seems to be taking on a life of its own. Where it’s different, however, is that in the 1990s, it was very broad spending. And today, it’s a handful of spenders and a handful of beneficiaries, quite frankly, of that spend. It’s circular, and it’s very narrow.”
Wilson also notes that initially, hyperscalers relied on their free cash flow to fund their AI spend, but notes the situation is changing as large-cap tech firms tap the debt markets.
“These hyperscalers are starting to borrow money to do the spending now. And that’s the beginning of the end, which is why a lot of those stocks aren’t trading as well as they have been. Because when they’re just spending free cash flow, it’s like, ‘OK, well, that’s fine. Maybe they’ll get a return on it.’
When you start layering on debt, though, all of a sudden, you start looking at that equity slice, and you’re like, ‘Whoa, wait a minute. I mean, this looks a little more risky.’
These are not asset-light businesses anymore. These are asset-heavy businesses. There’s a change. And they all can’t win. That’s starting to happen, but it’s not all happening all at once.”
According to Wilson, history shows that the AI buildout could last a few more years before something drastic happens that forces creditors to hit the pause button.
“In the 1990s, as you recall, the credit market peaked in the fall of ’98, and the stock bubble didn’t peak until the middle of 2000 or March of 2000. So the credit stuff is just starting to kind of fray a little bit, but in that space, there’s no forced liquidation yet from the credit providers to force these guys to stop spending.
And so I think there’s still a runway there, and we’ll see how it goes.”
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