As of this writing, the U.S. stock market is up almost 10% for the year, but not without a great deal of volatility, much of it related to the Iran conflict [1]

What’s driving the market this year despite the geopolitical headwinds?  Two words sum it up: artificial intelligence (AI).  In particular, it's those companies producing the memory and storage chips, software, and other technologies used to power AI.  This chart shows the increase in market capitalization this year for AI related companies:

[2}.

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Who are some of the biggest AI contributors to the market performance this year? [3]

These large technology companies are all competing in the AI computer hardware and semiconductor industries.  Their stocks have had eye-popping year-to-date market performance.

You may be asking yourself, but what of the Original (“Classic”) Magnificent Seven [4] (Amazon, Microsoft, Apple, Alphabet, Meta, Nvidia and Tesla)?  Here is a chart that shows their aggregate performance YTD (in green) [5] As a group, they have spent most of the year in negative territory, recently down about 8%.  For sure, not all of the Classic Mag 7 stocks are trading in the red this year, but you can see how much higher the rest of the market would have been without them (red line).

The market performance of the “New Mag 7” stocks have driven their stock valuations to very high levels, such that, according to investment research firm Morningstar, only two of the seven stocks (Dell Technologies and Advanced Micro Devices) are trading at what they consider to be fair value (the other five are considered to be overvalued).  This raises the perpetual question of what causes stocks like these to trade at such high prices?

Let’s look at things from a macro perspective. We are strong proponents of the idea that corporate earnings in the aggregate ultimately drive the value of the stock market in the long-term.  The chart below plots aggregate U.S. corporate earnings versus the performance of U.S. stocks since 1957 (in logarithmic scale) [6]. It shows the remarkable consistency of the relationship between corporate earnings and stock valuations over time.

Another chart shows the year-over-year percentage change in the S&P 500 Index (quarterly) versus the percentage change in the Wall Street forward 12-month earnings-per-share of the Index constituent companies. [7] Since the year 2000, there has been a very high correlation between these two data points.

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While we believe that the case for earnings supporting the market as a whole is a very strong one, if we consider individual stocks, however, things are not always so clear cut.  It often happens that investors can drive up share prices of companies beyond what some would consider to be reasonable levels, i.e. supported by realistic future earnings prospects.  A dramatic example of this occurred during the “Dot Com Bubble” of the late 1990s, which saw growth stock prices fall precipitously in early 2000 (value stocks proceeded to outperform growth stocks over the succeeding six years).

However, in the case of the “New Mag 7” companies, they are growing revenue at a very fast pace, have high and growing profit margins and are extremely profitable. Micron Technology, for example, reported revenue for the past quarter of $41.5 billion, up 346% year over year. [8]  These companies are at the leading edge of the AI revolution and stand to benefit from the continued capital expenditures of the so-called hyperscalers (Alphabet, Amazon, Microsoft, Meta and Oracle)) who are pouring money into building out the AI infrastructure, to the tune of $741 billion this year alone. [9]  A significant amount of that spending will go to “New Mag 7” companies.  This certainly justifies some level of increasing share prices for these and other companies benefiting from the AI technology wave.  Overall, the market doesn’t seem highly overvalued, with the S&P 500 “trading at about 20 times its projected earnings over the next twelvemonths, higher than the 10-year average of 19." [10]

To wrap this up, what are we to make as investors of the AI Revolution?  Should we lose sleep over the proper valuation of the New Mag 7 stocks?  Will they replace the Classic Mag 7 stocks?  

A core tenet of our investment philosophy at Coyle Financial is to remain focused on long-term investing.  We believe markets get valuations right over the long run, even if we do run into periods where valuations seem out of kilter.  We don’t want to ignore the short-term gyrations of the market and their apparent causes, but neither do we want to fixate on them.  We hope to capture the returns the market gives us over the long haul, based on decades of historical growing market returns supported by growing corporate earnings.  In other words, we think capitalism is alive and well, especially this year with the robust U.S. economy steamrolling along.

Value investing legend Benjamin Graham is famous for the quote “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”  We couldn’t agree more.

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• [1] YCharts
• [2] Torsten Slok, Apollo Global Management, Inc., email received 06/19/26. “Note: S&P AI is a representative basket of companies with exposure to artificial intelligence technologies and includes 84 companies.”
• [3] Morningstar Direct
• [4]To the best of my knowledge, no one else is calling this group of stocks “The New Magnificent Seven” or the “New Mag 7”.
• [5] Ed Yardeni Quicktakes, email received 6/23/26.
• [6] St. Louis Federal Reserve FRED database.
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