Investors are dialing back risk in technology equities as the market moves into the second half of 2026, with the Magnificent Seven among the most affected, Goldman Sachs derivatives specialist Brian Garrett said.
Garrett described the rotation away from the largest technology names as having a simple, visible logic. The market is increasingly rewarding companies that earn from capital spending - for example, suppliers and semiconductor vendors - while it is raising questions about companies that are doing the spending, namely hyperscalers, he wrote.
That distinction has led investors to distinguish between two groups within the tech complex: those that directly benefit from AI-related capex and those that are bearing the cost of the infrastructure buildout. According to Garrett, asset-light business models across some large tech firms are evolving into asset-heavy ones, creating fresh valuation and multiple questions for investors.
Goldman Sachs noted that if hyperscalers move to curb their spending, that could be beneficial for those individual hyperscalers from a cash-flow or profit perspective. However, Garrett warned that, on balance, such retrenchment would likely be a net negative for the broader market given the role hyperscaler spending has played in supporting suppliers and related businesses.
Absent a clear earnings inflection from hyperscalers, Goldman Sachs believes the predominant investor playbook has been to reduce risk in the largest names. Garrett pointed to options-market signals to support that view, highlighting that the cost of downside protection for the QQQ ETF is already materially higher than the comparable level for small-cap stocks.
The bank's cautious read is consistent with recent performance trends: the Magnificent Seven have broadly underperformed the wider market in recent months. Goldman Sachs expects the dynamic of differentiating between companies that generate returns from AI infrastructure spending and those that carry its cost to remain an important driver of positioning as the second half of the year unfolds.
Implications
- Sector rotation toward capex beneficiaries - notably semiconductors and related suppliers - is being rewarded relative to large spending hyperscalers.
- Options-market pricing, especially elevated costs for downside hedging in QQQ, is being used as an indicator of investor risk aversion within mega-cap tech.