Hedge Funds Bet Against Tech Titans: Mag Seven Cut to Two-Year Lows Ahead of Earnings

The Magnificent Seven—Apple, Microsoft, Alphabet, Amazon, Meta, NVIDIA, and Tesla—have long been the engines of the U.S. stock market, but hedge funds are now turning their backs. As Q1 earnings loom, holdings in these megacap tech stocks have dropped to a two-year low, signaling a dramatic shift in investor sentiment.

The Sell-Off Intensifies

Hedge funds slashed their exposure to the Mag Seven to levels not seen since early 2023, according to Morgan Stanley. These stocks accounted for over 60% of the total dollar amount sold by hedge funds during a three-day period in late March, ahead of earnings releases. The Roundhill Magnificent Seven ETF (MAGS), which tracks these stocks equally, fell 10.5% in March alone—its worst month since its 2023 launch—and was down over 15% year-to-date by April.

The sell-off reflects growing skepticism about the Mag Seven’s ability to sustain growth amid slowing earnings, regulatory risks, and geopolitical tensions. Tesla, once a darling of growth investors, led the decline with a 44% drop year-to-date, while NVIDIA fell 20% and Alphabet slipped 22%. Even Meta, the relative outperformer, saw shares dip 2% as investors rotated into safer assets like gold.

Why Hedge Funds Are Bailing

1. Slowing Growth: The Mag Seven’s earnings growth rate for Q4 2024 dipped to 31.7%, the lowest in two years. Analysts project a further slowdown to 18.5% for Q1 2025, as the “law of large numbers” limits hyper-growth.
2. AI ROI Doubts: Massive investments in AI infrastructure—like NVIDIA’s $85 billion capex guidance—are under scrutiny. While NVIDIA’s earnings remain robust, investors question whether returns will match the hype.
3. Trade Policy Risks: President Trump’s tariff threats on Chinese imports have spooked investors, exacerbating concerns about supply chains and profit margins.
4. Valuation Pressures: The Mag Seven’s forward P/E ratio stood at 28.3x in February /2025, still above the S&P 500’s 21.8x multiple, despite declines from 2024’s peak.

The Sentiment Shift

A Bank of America survey underscores the change: just 24% of investors now see the Mag Seven as the “most crowded trade,” down from 60% in late 2024. Gold has taken the crown, with 49% of respondents favoring it—a stark contrast to tech’s previous dominance.

Meanwhile, hedge funds are reallocating capital to sectors like healthcare (e.g., CVS Health’s 50% surge in 2025) and AI-enabled software companies. Even within tech, the focus has shifted to “Phase 3” firms integrating generative AI into services, rather than the Mag Seven’s hardware and infrastructure plays.

The MAGS ETF: A Mirror of Sentiment

The MAGS ETF’s structure—equal-weighted quarterly rebalancing—aims to mitigate concentration risks, but it hasn’t insulated investors from the Mag Seven’s struggles. The fund’s 0.29% expense ratio and tax efficiency via total return swaps haven’t outweighed the macro headwinds.

Risks Ahead

• Regulatory Scrutiny: Antitrust actions and data privacy laws could constrain Mag Seven profits.
• Profit Margin Pressure: While the group’s net profit margin hit 25.8% in Q4 2024, the broader S&P 500’s 13.4% margin suggests the Mag Seven’s margins may not be sustainable.
• Rotation Risks: International equities and gold have outperformed U.S. megacaps, with European stocks rising 12% in Q1—their strongest relative performance ever.

Conclusion: A New Era for Tech Titans?

The Mag Seven’s dominance—contributing over 50% of the S&P 500’s returns in 2023–2024—is fading. With hedge funds cutting holdings and earnings growth slowing, investors must weigh the stocks’ massive market influence against mounting risks.

While the Mag Seven still represent 34% of the S&P 500’s total capitalization, their recent 15% YTD decline and 44% drop in Tesla’s valuation highlight vulnerabilities. The shift to gold and healthcare, along with skepticism about AI’s ROI, suggests the market is pricing in a prolonged slowdown.

For investors, diversification is key. The MAGS ETF’s equal-weight design reduces overexposure to any single stock, but its -15% YTD return underscores the broader tech sector’s challenges. As earnings season begins, only a surprise beat—like NVIDIA’s strong AI chip sales—could reverse the Mag Seven’s two-year low exposure and restore confidence. Until then, the tech giants face a uphill battle to regain their former glory.