NYSEThe Magnificent Seven is no longer relevant as a term to describe the market's top growth stocks, Citi says. The bank said that it's clusters framework is a better method to pick winners. The growth cluster comprises stocks that have contributed the most to earnings growth and are directly influenced by AI. The Magnificent Seven had a good run, but the reign of the high-flying tech titans is over, Citi says. The Mag Seven crushed the market in the years since the AI boom kicked off at the end of 2022, but their fortunes as a group have reversed. The Roundhill Magnificent Seven ETF is up 1% this year, lagging the 9% gain in the S&P 500. Investors have punished some names in the Mag Seven more than others, partly due to wariness about valuations, concerns about capex, and an uncertain outlook for software as AI tools proliferate. Microsoft, the group's worst performer so far in 2026, is down 17%, with its latest leg lower triggered by fears over heavy AI capex."In our view, the Mag 7 is dead as a construct for assessing large-cap growth dynamics, and it has been for some time," strategists at Citi wrote in a recent note to clients.But there's one group of stocks the bank said it was looking at in the Mag 7's place: it's the stocks in Citi's "growth cluster," a bucket of growth names that have contributed the most to the S&P 500's earnings in recent quarters.The growth cluster — which Citi first introduced several years ago, but analysts said the bank recently refined — makes up around half of the S&P 500's total market cap. The group includes companies spanning across six different industries, and has handily beaten the S&P 500 so far this year.The group of growth stocks the bank tracks gained 25% in the second quarter and is up 12% for the year, compared to the 15% quarterly gain and 10% year-to-date gain in the broader index.ReturnS&P 500Growth clusterFirst quarter-4.6%-9.4%Second quarter14.9%24.7%Year-to-date10.1%11.8%The bank's growth cluster also beat Citi's cyclical and defensive clusters. Analysts said there are a few reason the group has been outperforming:Earnings growth has spread beyond the mega-cap tech sectorCompanies outside of the Mag Seven have done a lot of work in lifting the S&P 500 this year. If you invested in a weighted index of the top 25 stocks that have contributed the most to the S&P 500's returns so far this year, you would be up 7% year-to-date, compared to a 2% gain in the Mag Seven, the bank said."Even a Mag 10 breakout would miss significant earnings contributors," strategists added, pointing to strong earnings at companies like Intel, Applied Materials, and Lam Research Corp.Growth stocks have also consistently blown past analysts' earnings expectations, which have also helped power the cluster higher. Citi's growth cluster now makes up around 48% of the S&P 500's expected earnings over the next 12 months, analysts said.Valuations are more attractiveThe Magnificent Seven tech giants have stumbled as investors have taken profits and sought more attractively priced opportunities elsewhere.Valuations for the growth cluster look more attractive relative to the Mag Seven alone, Citi said. The price to earnings-to-growth ratio, one valuation measure, is at a 15-year-low for companies in Citi's growth cluster, analysts wrote."In the current case, forward growth expectations reflect the ongoing momentum on semis/hardware from the AI capex tailwind along with the rather episodic surge in commodity semi growth predicated on its current bottleneck circumstance. So, what we get is a setup whereby the stocks do not appear to be fully discounting a secular growth opportunity," the bank added. The AI trade has seen uneven results so far in 2026 amid an ongoing rotation. The churn has impacted semiconductor and memory stocks the most, with the iShares Semiconductor ETF plummeting 18% and the Roundhill Memory ETF falling 32% in the last month."We don't think there is any one right way to perfectly describe how much of the S&P 500 reflects the AI trade," Citi said. "We believe our cluster approach to assessing the S&P 500 makes intuitive sense and gets us close. In this work, the takeaway is that the AI influence per the growth cluster says that roughly 55% of the S&P 500 is directly influenced by AI tailwinds/headwinds with nearly half of index earnings attributable to this cohort."Read the original article on Business Insider
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