The economist who coined the phrase ‘Magnificent 7’ says the very thing that made them extraordinary is under threat

In May 2023, Bank of America's Michael Hartnett coined the phrase "Magnificent 7" to represent a group of American companies driving the stock market during an AI boom, featuring firms like Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla. While the Mag 7 remains dominant, their unique trait of generating substantial cash without spending it is now a vulnerability, according to Hartnett.

Increasing bond yields and rising borrowing costs have forced these tech giants to spend heavily on AI capex, resulting in a $200 billion negative cash flow. As Hartnett explains, the Mag 7's ability to thrive depends on the bond market, as they must become more subservient if bond yields surge. Wall Street is divided on U.S. Treasury Secretary Scott Bessent's bond buyback scheme, but economists agree that it highlights the importance of the Treasury stepping in to manage volatility.

While 5% is a threshold that investors watch, its impact may not be immediate. Hartnett emphasizes that the threshold matters more to policymakers, as higher yields might limit AI companies' capacity to borrow for AI capex, potentially undermining the wealth effect that has driven the equity market. Geopolitically, the U.S. aims to outpace China in AI, and they're unlikely to tolerate a turbulent bond market, which may explain their determination to prevent such an event. The main threat to the Mag 7 from Main Street, however, comes from voters.