Why even gilts are outperforming the once unstoppable Magnificent 7 this year
Plagued by sticky inflation and spendthrift politicians, the UK government’s bonds have spent years as an unloved asset class. But six months into 2026 and they have, so far, outperformed the Magnificent 7. Ali Lyon examines what has gone wrong for the so-called hyperscalers even as AI hype is greater than ever.
Since the Bank of America’s Michael Hartnett coined the phrase in early 2023, the companies in the Magnificent 7 have more than lived up to their billing.
So called for their unrivalled market dominance, astronomic free cash flows and historic runs of posting estimate-dwarfing earnings, the club of seven stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – have made stock market history over the past three-and-a-bit years.
Combined, their shares are up some 165 per cent since the seminal Bank of America note. Investors were happy to chuck inordinate amounts of cash at them – and willing to stomach sky-high valuations – to gain exposure to the firms they felt would usher in the next general purpose technology.
Or at least they were until, at the turn of the year, those same investors began to lose faith in the group’s capacity to keep delivering eye-popping returns. In the first half of 2026, the average stock price of the fraternity of technology juggernauts – known as ‘hyperscalers’ – was up just 1.7 per cent; close to a real terms loss in both American and British money and a drag on almost every share index in which they are included.
FTSE 250 > Magnificent 7
Absent a hard crash, the slowdown has not garnered the attention it otherwise might have. But in the context of the cohort’s glittering run between 2021 and 2025, it represents an astonishing collision with the buffers. Not only have they been outshone by almost all of Europe’s major bourses, investors in a Magnificent 7 tracker would have made more had they parked their money in the deeply unfashionable FTSE 250.
Even the UK’s embattled, unloved government bonds have – according to a piece of analysis from Deutsche Bank’s Jim Reid – outperformed the once-unstoppable cohort of tech stocks since the turn of the year.
It has hardly been a red letter year for Britain’s sovereign securities – known as gilts – either. Across both long- and short-dated bonds, the UK started 2026 on a strong footing thanks to Budget speculation receding, a succession of positive public finance numbers and, most significantly, signs inflation was being successfully squeezed out by both the Treasury and Bank of England.
But a two-month run of gradually falling yields – meaning the value or price of a bond is rising – was then upended by Donald Trump’s decision to launch a series of air strikes on Iran, wiping progress out almost overnight. The UK’s short-term gilts, which track interest rates closely, had been priced to suggest there would be three interest rate cuts in 2026, swung suddenly to predict as many as four interest rate rises.
And yet despite suffering their worst month since Liz Truss’s fateful mini-Budget in March, gilts have still fared better this year than the seven stocks responsible for powering global equity markets to a succession of all-time highs since 2021.
‘The animal is changing’
To Roger Lee, head of equity strategy at boutique investment bank Cavendish, it is not that investor optimism on artificial intelligence’s transformational potential has cooled. Rather, in racing to build out the vast datacentres required to power their models, the likes of Alphabet, Microsoft and Meta have become entirely different investment propositions.
“The animal is changing,” he told Morning Wire. “They were these massively cash-generative, very high margin businesses with very low fixed assets, and they’re evolving into businesses that are not as cash-generative. They are spending all their free cash, and they are actually borrowing to fund additional contracts… and I think that’s part of the reason why the market is taking a more sceptical view of them today.”
Lee’s belief crystallised at The Magnificent 7’s most recent earnings season. All seven lived up to the sky-high expectations set by Wall Street and City analysts in the first three months of the year, beating earnings per share estimates to a number. And yet, despite the succession of blowout updates, the stock market largely shrugged. Meta and Microsoft’s shares actually fell, with investors fearful their historic capital expenditure programmes might be getting overly ambitious.
As a whole, the cohort has pledged to invest a combined $700bn (£523.6bn) into artificial intelligence – a figure set to rise to $1.6 trillion in just a few years. Some of that will be funded via record-breaking equity raises, like Google-owner Alphabet’s decision to issue $90bn of shares last month. But much of it has come from mutual decisions to stop buying back shares and go cap in hand to the corporate bond market.
“The debt issuances have been well received,” added Lee. “And one would imagine they have got a lot of firepower if they want to continue to deploy it. But on the other hand, the stock price would suggest the market is getting concerns about what future returns they’re going to generate.”
Magnificent 7 out, chipmakers in
The Magnificent 7’s loss has been chipmakers’ gain. Korea’s KOSPI index, which given the sheer volume of semi-conductor firms it plays host to has become something of a proxy for the entire sector, has risen by more than 77 per cent this year, as investors lined up to hand their cash to the firms that stand to gain from the tech juggernauts’ unprecedented infrastructure rollout.
“Hyperscalers are investing hundreds of billions in chips, data centres and power capacity, while semiconductor companies are the primary beneficiaries of that spending,” Sophie Huynh, portfolio manager at BNP Paribas Asset Management told Morning Wire. “In essence, it is a case of ‘your capex is my opportunity’.”
All the while, gilts have staged something of a recovery since the US inked its 60-day ceasefire with Iran. Since peaking at 5.2 per cent in late April, the yield on the 10-year gilt has receded to 4.8 per cent. And performance has been better still for shorter-term coupons, given their close correlation with interest rate expectations.
“The retreat in oil prices to the more benign end of plausible outcomes has triggered a paring back of rate hike expectations globally,” said Henry Cook, senior economist at MUFG, adding: ” Some comfort has also been taken from Burnham’s apparent commitment to operating within the existing fiscal framework. That has reduced concerns about a material near-term shift in fiscal policy.”
All of which could be upended, warns Cavendish’s Lee, if rumours that the UK’s energy secretary is in line to win the race to be Andy Burnham’s Chancellor materialise: “It’s such a consensual view now that the market would not react well to Miliband.”
For now, though, both the UK’s plucky, erratic government bonds – and its second-tier FTSE 250 index – are outperforming seven of the greatest companies ever to have existed. And they’ve done so for more than half a year.