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AI spending is expected to remain elevated in 2026 after heavy investments in 2025.
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Magnificent Seven companies generate massive cash flows and retain flexibility to cut AI budgets if returns disappoint.
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Meta trades at 29.2x P/E while Tesla commands a higher valuation among Magnificent Seven stocks.
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AI spending was quite hefty in 2025, and that alarmed some investors, especially going into the back half of the year. In 2026, the spending spree isn’t expected to cool off, and that could cause AI bubble concerns to inflate further. Undoubtedly, higher AI spend might be causing some investors to shy away from their favorite tech stocks in the new year. But after a bit of pressure, I don’t think throwing in the towel on the Magnificent Seven names is the right call, especially if they can offer more guidance in terms of the long-term monetization plan.
Who knows? Perhaps showing evidence of improved monetization might comfort investors enough to allow for even more spending. Of course, if ROIs or expectations of longer-term ROIs fall short, the AI spending bubble could burst, and we might just see steep budget cuts across the board.
Undoubtedly, the managers running the show at the big tech titans and leading AI startups seem to understand the high risks (some have even expressed concerns about the possibility of an AI bubble) involved with spending heavily. But they also understand the potential gains that the revolutionary technology can provide, perhaps better than anyone else.
And given the flexibility to lift their foot off the gas (think the efficiency years that followed the post-pandemic hiring boom), I think big tech might still be worth sticking with for the long haul, even though a bear market might prove severe if there is a “follow the leader” towards AI spending cuts, as there was towards an AI spending surge.
Either way, it looks like the AI boom might be more of a multi-year one than the relatively short-lived one during the earlier days of the pandemic.
Add the massive cash flows that your average Mag Seven member generates and I think the Mag Seven have everything it takes to stay magnificent in the coming years, even if turbulence were to pick up suddenly, either due to a big earnings miss from the likes of an Nvidia (NASDAQ:NVDA) or something more similar to the DeepSeek shock from a year ago, which might cause heavier AI spenders to take an even bigger hit to the chin.
Perhaps it’s the things we don’t see on our radar, such as something similar to a DeepSeek, that investors should be ready for, and the potential impact on AI stock valuations. It could be short-lived and more of an opportunity, like in the case of the DeepSeek shock, but preparing for volatility remains the name of the game, especially for those of us who are overweight in the Mag Seven names, which are already very well represented in the S&P 500.
So, as AI spending marches higher, I think investors should also pay careful attention to what big tech is telling us about the monetization opportunities to be had. For those of us uncomfortable with front-loaded AI spend for long-term profit, perhaps diversifying away from the AI plays could make a lot of sense.
Either way, for those who believe in the visionary leaders atop the Mag Seven, perhaps there’s no reason to hit the panic button, even if gains become harder to come by, as investors digest higher valuations while weighing the full extent of the risks of an AI-induced bubble bust or something less severe (a handful of bear markets with more pain dealt to the more indebted AI spenders with circular deals).
As always, higher rewards come with higher risks. And in the case of the Mag Seven, investors might wish to be more selective, opting for the cheaper members (like Meta Platforms (NASDAQ:META) at 29.2 times trailing price-to-earnings (P/E)) than the pricier ones (think Tesla (NASDAQ:TSLA)).
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