Rob Arnott raises concerns that the Magnificent Seven stocks are in a bubble poised for further unwinding. Since February 19, the S&P 500 has experienced an 8% decline as investors navigate shifting trade policies and expectations regarding AI. Arnott advises looking into small-cap, non-US, and emerging-market stocks as potential opportunities for 10% annualized returns.
According to Arnott, the decline in tech stocks may not be finished yet. “We’re witnessing the unwinding of a bubble,” he stated in an interview on Thursday. “I can’t say whether it will manifest as a bear market or just a bear market among the Magnificent Seven.” He likened the current market conditions to those leading up to the dot-com bust, noting, “A couple of years ago, I felt like we were in 1998. Now, it has the hallmarks of 2000.”
The bubble in question largely concerns the AI-focused Magnificent Seven stocks — Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta, and Tesla. Arnott’s forecasts for further declines stem from anticipated reductions in investor expectations rather than directly from trade conflicts or economic threats.
In November, Arnott indicated that the mega-cap tech stocks could face disruption, as companies at the forefront of innovative fields typically struggle to maintain their market dominance. This theory is gaining traction, as exemplified by the launch of a cost-effective chatbot by Chinese firm DeepSeek in January.
Arnott assesses the gravity of the bubble as considerable due to the concentration of the market within these top stocks. The five largest companies represent about 27% of the S&P 500, a stark contrast to the 17% seen during the peak of the dot-com bubble. “This market is not only more concentrated than it was at the height of the dot-com era, but it is also at its most concentrated in U.S. stock market history dating back to the late 1800s,” he remarked.
The significant influence of the Magnificent Seven stocks on the overall market trajectory indicates that a continued downturn could jeopardize the broader S&P 500. However, Arnott noted that the index may not be adversely affected if other market segments remain stable.
At present, Arnott expresses strong optimism towards small-cap stocks, non-US stocks, and emerging-market value stocks, asserting that these areas could yield 10% annualized returns over the next decade. Suggested funds that provide exposure to these sectors include the Schwab US Small-Cap ETF (SCHA), the Vanguard FTSE All-World ex-US ETF (VEU), and the iShares MSCI Emerging Markets Value Factor ETF (EVLU).
