US | What’s happening to the Magnificent-7?
The idea of US exceptionalism has to do with the outperformance of the US economy and the corporate sector because of stronger fundamentals, an AI-driven innovation boost and supportive policies, as investors have experienced over the past couple of years. But, so far in 2025, this hasn’t been the case: the seven largest US stocks, the so-called Magnificent-7, are made up of Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. Collectively, the Magnificent-7 are down around 6% in 2025. This dip started after the launch of DeepSeek, a Chinese AI model.
DeepSeek claimed it was able to deliver comparable results to its US competitors at a fraction of the cost, triggering concerns about the valuation of US tech companies and the start of the US tech sell-off. Given the size of these seven stocks (they account for around 30% of the total value of the S&P 500 index), when they fall their weight drags down the broader index. This is why US equities have underperformed their European, UK and emerging market counterparts this year.
Meanwhile, in China, companies are increasing their investments in AI. Chinese holding Alibaba Group announced it will invest USD 50 billion in cloud computing and AI infrastructure over the next three years. This marks the largest Chinese private-sector investment in computing infrastructure and represents a significant increase compared to the company’s AI-related spending over the past decade.
Despite the recent trend, we’re optimistic about the AI outlook. Last week, Nvidia reported revenues that exceeded analyst expectations and provided upbeat guidance for future demand. We remain convinced that increased competition is a positive development for AI companies that aim to be leaders. Therefore, as part of our current slight equity overweight, we still prefer US equities due to the better growth prospects and fiscal stimulus.
That said, because of the rich valuations of the Big Tech companies and concentration risk, the part that makes us overweight US equities isn’t tech (where our tactical positioning is roughly in line with our long-term allocation). We’re overweight via an equal-weighted index. This reduces the impact that the Magnificent-7 has on performance and offers diversification, emphasising financials and industrials, which could benefit from forthcoming US policies, such as fiscal stimulus. In addition, we hold ‘insurance’ instruments in the US and Europe, which appreciate when equities decline (in portfolios where client knowledge and experience, regulations and guidelines permit). These diversification and protection strategies help us cushion bouts of market volatility.
Global | Is the outlook deteriorating?
The short answer is no. We still believe growth will slow towards long-term trends but stay positive, and inflation will settle at the 2% target in Europe and just above in the US, warranting interest rate cuts (though more and faster in Europe and fewer and slower in the US). But risks to this outlook are increasing somewhat.
Uncertainty is now running high, driven by rapid (and sometimes changing) policy announcements under Trump 2.0, a reshuffle of the AI landscape and Europe’s challenges in adapting to ongoing geopolitical shifts. In the end, markets are still trying to keep up, and so they’re sending mixed messages.
For now, not all of Trump’s initiatives have been made into law, but tariffs on Canada, Mexico and China are likely to go into effect this week. Tariffs are no longer a question of “if” but “when”. We expect tariffs on Europe, too. In all these economies, we’ll likely see a negative impact on economic growth. The big question is the effect on the US economy.
Of course, the biggest risk is that Trump overplays the trade card, causing a global recession that washes back to US shores. However, we think currency adjustments (a stronger USD at the expense of currencies of countries targeted with tariffs) will cushion the impact of higher tariffs, limit the increase in import costs and keep a downturn in the US at bay. In addition, some fiscal expansion and deregulation will buoy growth in the US.
But risks do linger in investors’ minds. As a result, the 10-year US Treasury yield is down around half a percentage point since the beginning of the year. Markets also now expect the US Federal Reserve to cut rates two to three times this year (in line with our view), and US defensive sectors have recently been outperforming cyclicals. This suggests that the market is concerned about the outlook for US growth, something we’ll keep an eye on.
This week | the ECB is likely to cut rates further, markets watching US economic data
In Europe, the European Central Bank (ECB) meeting (Thursday) will take centre stage. We expect the ECB to deliver its sixth rate cut in the current cycle (and the second this year), bringing the deposit rate from 2.75% to 2.50% as inflation normalisation looks on track. In the US, alongside trade policy and geopolitical announcements, the focus will be on key data with the ISM reports for February. The one for the vast services sector is out this Wednesday. In addition, we have the US jobs report (Friday), which should reveal continued employment growth and a very low unemployment rate. We think this week’s data may reassure investors that the US economy remains resilient.