Mega-cap tech companies lead the markets higher

A version of this post first appeared on TKer.co

Mega-cap tech companies have been leading the stock market higher. AI investment has been driving economic growth. We hear about these storylines every single day in finance media.

Occasionally, some charts and stats cut through the noise and offer some killer context. Here are a couple that recently caught my eye.

Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta (META) Platforms, and Tesla (TSLA) — the trillion-dollar companies collectively known as the “Magnificent Seven — account for about a third of the S&P 500’s combined market capitalization.

This concentration among the largest companies makes some people nervous. Because what if one or more of these companies sees demand sour and investors dump the stocks?

My favorite counterargument to this concern is that these seven companies don’t operate just seven businesses.

“They may go by the Magnificent Seven, but the truth is they act more like the Magnificent Seventy,” Bloomberg’s Eric Balchunas and Breanne Dougherty wrote. “Collectively, the Seven have acquired over 800 companies and expanded into a dizzying array of industries — effectively functioning as conglomerates of advanced technology, while still growing organically.”

Each of the Magnificent Seven companies are made up of massive companies. (Source: Eric Balchunas)

For the most part, the subsidiaries are tech-oriented or businesses leveraging a lot of tech.

Still, it is nearly impossible to find a household or business that isn’t regularly using multiple goods or services offered by at least a few of these names.

“Viewed this way — as dozens of companies within each one — concerns about their record 33% weighting in the S&P 500 miss the point: the index may still be as diversified as ever,” Balchunas and Daugherty added.

For more on this discussion, read: The FAAMGs are more than just five stocks 🤨 and The biggest stocks in the market are massive for a reason 💪

AI has been a hot story for about three years. And the buzz only seems to be heating up.

Check out this chart from Luke Kawa at Sherwood News. It tracks analysts’ estimates for AI capex by the major hyperscalers: Microsoft, Alphabet, Amazon, Meta, and Oracle. The curve suggests the investment spending is accelerating.

AI capex spending by the hyperscalers has been heating up. (Source: Sherwood)

And just how big is the AI capex story in the context of the economy?

Renaissance Macro’s Neil Dutta caught this incredible development in the most recent GDP report.

“So far this year, AI capex, which we define as information processing equipment plus software, has added more to GDP growth than consumers’ spending,” Dutta said.

AI capex is contributing more to GDP growth than personal consumption. (Source: Sherwood, Renaissance Macro)

What’s so impressive about this is how small AI capex is in the context of the economy.

“The U.S. consumer makes up about 70% of the economy,” Sherwood’s Kawa noted about the stats. “Over the long term, that’s been the undisputed engine of growth. But these two segments that make up 6% of GDP have been playing a bigger role in fueling the expansion so far this year, on average.”

In other words, a relatively small slice of the economy is growing so fast that it’s become the dominant growth story for the whole economy.

There were several notable data points and macroeconomic developments since our last review:

👎 Inflation expectations heat up. From the New York Fed’s July Survey of Consumer Expectations: “Median inflation expectations in July increased at the one-year-ahead horizon to 3.1% from 3.0% and at the five-year-ahead horizon to 2.9% from 2.6%. They remained steady at the three-year-ahead horizon at 3.0%.”

(Source: NY Fed)

The introduction of new tariffs risks higher inflation. For more, read: 5 outstanding issues as President Trump threatens the world with tariffs 😬

⛽️ Gas prices tick higher. From AAA: “Gas prices fluctuated slightly this past week with the national average for a gallon of regular going up by two cents to $3.16. Crude oil prices are hanging in the mid $60s per barrel, keeping pump prices steady. Supply remains abundant, as OPEC+ — a group of oil-producing countries — recently announced it will be boosting production again next month, following several other increases this year.”

(Source: AAA)

For more on energy prices, read: Higher oil prices meant something different in the past 🛢️

🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.63% from 6.72% last week. From Freddie Mac: “The 30-year fixed-rate mortgage dropped to its lowest level since April. The decline in rates increases prospective homebuyers’ purchasing power, and Freddie Mac research shows that buyers can save thousands by getting quotes from a few different lenders.”

(Source: Freddie Mac)

There are 147.9 million housing units in the U.S., of which 86.1 million are owner-occupied and about 39% are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

🏭 Business investment activity deteriorates. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — decreased 0.8% to $75.4 billion in June.

(Source: Census via FRED)

Core capex orders are a leading indicator, meaning they foretell economic activity down the road.

For more on deteriorating economic metrics, read: We’re at an economic tipping point ⚖️

💼 New unemployment claims remain low — but total ongoing claims are up. Initial claims for unemployment benefits rose to 226,000 during the week ending Aug. 2, up from 219,000 the week prior. This metric remains at levels historically associated with economic growth.

(Source: DoL via FRED)

Insured unemployment, which captures those who continue to claim unemployment benefits, rose to 1.974 million during the week ending July 26. This metric is near its highest level since November 2021.

(Source: DoL via FRED)

Steady initial claims confirm that layoff activity remains low. Rising continued claims confirm hiring activity is weakening. This dynamic warrants close attention, as it reflects a deteriorating labor market.

For more context, read: The hiring situation 🧩 and The labor market is cooling 💼

💪 Labor productivity increases. From the BLS: “Nonfarm business sector labor productivity increased 2.4% in the second quarter of 2025 … as output increased 3.7% and hours worked increased 1.3%. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 1.3% in the second quarter of 2025.”

(Source: BLS)

For more, read: Promising signs for productivity ⚙️

🤑 Wage growth is cool. According to the Atlanta Fed’s wage growth tracker, the median hourly pay in July was up 4.1% from the prior year, down from the 4.2% rate in June.

(Source: Atlanta Fed)

For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈

💰 Household finances could be better, but are mostly normalizing. From the New York Fed’s Q2 Household Debt & Credit report: “Transition into early delinquency held steady for nearly all debt types except for student loans. Student loans saw another uptick in the rate at which balances went from current to delinquent due to the resumption of reporting of delinquent student loans. Transitions into serious delinquency were mixed across debt types: auto loans and credit card debt were largely stable, mortgages and HELOCs edged up slightly, and student loans rose sharply.”

(Source: NY Fed)

While the rate at which debt is entering delinquency has increased, the total amount of debt in delinquency remains low, at just 4.4% of outstanding debt.

(Source: NY Fed)

And while credit card debt balances often steal headlines, it’s a mistake to say consumers are maxing out their credit cards. The $1.2 trillion in credit card balances as of Q2 represents just a tiny fraction of credit card limits.

(Source: NY Fed)

For more on household finances, read: Americans have money, and they’re spending it 🛍️

💳 Card spending data is strong, but could be driven by “buyahead” before tariffs. From JPM: “As of 31 Jul 2025, our Chase Consumer Card spending data (unadjusted) was 3.3% above the same day last year. Based on the Chase Consumer Card data through 31 Jul 2025, our estimate of the US Census July control measure of retail sales m/m is 0.61%.”

(Source: JPM)

From BofA: “Total card spending per HH was up 3.0% y/y in the week ending Aug 2, according to BAC aggregated credit and debit card data. Online retail saw the biggest y/y spending gain while entertainment saw the biggest drop vs last week, across our categories. The significant rise this week could be buyahead before the Aug 1 tariff deadline/early month volatility.”

(Source: BofA)

For more on sales being pulled forward ahead of tariffs, read: A BIG economic question right now 🤔

🤷🏻 Services surveys could be better. From S&P Global’s July Services PMI: “July’s expansion was driven by surging demand in the tech sector alongside rising financial services activity, the latter linked to improving financial conditions fueled in turn by recent stock market gains. However, falling exports of services, which includes spending in the US by tourists, acted as a drag on growth alongside subdued demand from consumers more broadly.”

(Source: S&P Global)

ISM’s July Services PMI signaled the sector was just barely growing.

(Source: ISM)

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.

For more on interpreting soft sentiment data, read: What businesses do > what businesses say 🙊

🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy was 63.5% on Tuesday last week, down 1.4 points from the previous week. Occupancy fell most days of the week in all 10 tracked cities, as workers took time away from the office across the country. The average low was 34.2% on Friday, down nine tenths of a point from the previous week.”

(Source: Kastle)

For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 2.5% rate in Q3.

(Source: Atlanta Fed)

For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and You call this a recession? 🤨

🚨 The Trump administration’s pursuit of tariffs threatens to disrupt global trade, with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get more clarity, here’s where things stand:

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, although cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — shifted its focus toward supporting the labor market.

But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings and core capex orders have faded. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

A version of this post first appeared on TKer.co