‘Say thank you and get out’: Why one top strategist says to dump the Magnificent 7 now

But U.S. big tech investors are a in for a special world of hurt, he predicts. When he digs into the difference in prospects between the S&P value and growth contingents, a big gulf emerges. The RA model predicts 4% annual gains in the former and a shockingly puny 1.4% in the latter, meaning the recent champs’s returns will lag inflation by one-percent. Much of the drag, he says, arises from the big valuations, on top of earnings so gigantic they’ll be hard to grow big from here. A major reason we saw that double-digit EPS boom rampage, he avows, “is the stupendous growth in the Mag 7.” Now, he adds, “Valuations for growth stocks are very stretched, driven by the Mag 7. The market’s saying it’s a foregone conclusion they’ll grow earnings like crazy. But to beat the market, they’d need to grow earnings even faster than those lofty expectations.”

Arnott’s especially skeptical of the premium prices awarded by investors expecting fantastic profits from AI. “The companies making money from AI are the ones selling the tools,” he says. “They’re now lending to their own customers so that those customers can keep buying their stuff. And their customers are having a hard time monetizing that equipment.” Arnott related that he’d just used Perplexity to perform an in-depth study of how various tax increases being proposed would affect marginal rates at different income levels, and paid nothing for the service. “These AI providers will figure out how to make money,” he says. “But not as fast as the expectations that are built into their stock prices. It will be a slow build over a long period, meaning returns on these stocks will be much lower than the market’s baked in.”

Here’s his advice: “If you’ve owned the Mag 7, say ‘thank you very much, Mag 7,’ and get out and don’t ride them back down.” Arnott believes that returns will be much bigger outside the U.S. than stateside. For example, RA posits that developed nation, non-U.S. value stocks will provide 7.4% returns going forward, more than twice the expectation from the S&P 500, and that emerging markets value shares will do even better at 7.6%. Arnott concludes that the best strategy is to “first, own no U.S. shares or at least lighten up, and second, own no growth stocks anywhere.”