When we tell you about the S&P 500 stock index – that it moved on any given day – the reality is that much of that movement is driven by just seven stocks known as the “Magnificent Seven,” or “Mag Seven.”

The “Magnificent Seven,” is composed of Nvidia, Apple, Microsoft, Amazon, Meta, Alphabet and Tesla. Combined they make up more than a third of the S&P 500 – around $20 trillion.

A lot of that value has built up in just the last few years and is tied to investors' hopes for how artificial intelligence will transform our lives. But when values quickly balloon, there come questions about a potential bubble. 

Marketplace’s Nova Safo spoke with Dean Smith, chief strategist at FolioBeyond, for more. The following is an edited transcript of their conversation.

Nova Safo: So do you believe the AI trade - and by extension, the growth of the value we've seen in The Magnificent Seven stocks - do you think all of that is overvalued in the market right now?

Dean Smith: The stocks that make up the Mag Seven have really taken on a life of their own. That doesn't mean that they're completely divorced from fundamentals. It does mean, however, that we need to be really cautious as we look at the valuations that are placed on these stocks. Anytime you get above 100 times earnings, you're into speculative territory.

Safo: We've been in that territory for a bit now. Why are we hearing more concern coming out from analysts and investors now versus say, a year ago?

Smith: The technological developments in terms of software, models, hardware, data centers, all that's very real. That's the first part of the story.

The second part of the story is adoption of this technology, that has hit a little bit more of a rough road. Businesses have been trying to find ways to incorporate the AI technology and innovations into their workflows and business processes. That's turning out to be much, much harder.

Safo: Well, how much is this reminiscent of the dot com bubble of the late 90s, early 2000s? And are we heading toward another bubble here, or a burst of a bubble?

Smith: You know, you can only tell if something's a bubble in hindsight, of course, but I would say there's some real differences between what's happening today as compared to the dot com bubble you referred to.

In the case of the dot com bubble, everybody wanted to be something or other dot com and a lot of that was just nonsense, right? I mean, the classic example, of course, is pets.com with their sock puppet mascot.

Safo: I used to love their commercials.

Smith: Yeah, absolutely. But the AI revolution is something different. We don't know exactly where it's going to go, but the real innovation that's happening now is so called “agentic AI.” These agents, they can run software, they can write software, they can do accounting functions, they can do all kinds of things that go far beyond simply asking ChatGPT a question.

The widespread development and adoption of agentic AI is the next step up, and that's what makes me really confident that this is not just another dot com bubble.

Safo: So not a bubble, but perhaps some overvaluation in the market?

Smith: That's exactly right. These are, by any measure, very, very expensive stocks. In addition, you've got many, many billions of valuation that's still privately held in private equity and venture capital firms, okay. So there is just been an explosion in the valuations that is going to be really hard for a lot of these companies to grow into. So to the extent there's a bubble, if you want to call it that, it's there. It's in the valuations. It's not in the AI technology itself.