With the "Magnificent Seven" at 35% of the S&P 500 and the "Ten Titans" at 40%, Are AI Growth Stocks Poised for a Sell-Off or Is There Still Room to Run?

For over a decade, the simplest way to outperform the S&P 500 has been hiding in plain sight: mega cap growth stocks.

In 2018, Apple became the first U.S. company to surpass $1 trillion in market capitalization. Fast forward, and Nvidia just surpassed $5 trillion in market value. Microsoft and Apple are hovering around $4 trillion. And Alphabet has more than doubled from its 52-week low and is now worth over $3 trillion.

The "Magnificent Seven" is a term for seven growth-focused companies that caught on in 2023 as Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta Platforms, and Tesla soared to new heights. Investor excitement for artificial intelligence (AI) only accelerated the rally -- with the Magnificent Seven making up 35.4% of the S&P 500 at the time of this writing.

The Magnificent Seven, plus Broadcom, Oracle (NYSE: ORCL), and Netflix, form a new group that is more representative of market leadership. Known as the "Ten Titans," these 10 stocks account for a mind-numbing 40.2% of the S&P 500. And it's worth mentioning that these weightings don't even account for the post-earnings rally in Apple or Amazon.

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Here's what investors can do to navigate today's highly concentrated stock market, how to stay even-keeled with the market at all-time highs, and if there's room for the Ten Titans to run even higher.

Expectations are everything

Higher earnings justify higher stock prices. But lately, stock prices have been growing faster than earnings, which is stretching valuations at both the index level and for many individual stocks. Expensive valuations aren't inherently bad. They just mean that investors are willing to pay a higher price for shares in a company based on its future growth potential.

There are plenty of examples where trailing earnings don't even matter that much. Especially when a company unlocks a new revenue stream, like Nvidia did with graphics processing units and associated software for data centers. Or how Amazon's most profitable segment shifted from online retail to Amazon Web Services. Some investors hope that Tesla's main profit driver will move from selling electric vehicles for mostly personal use to monetizing a fleet of self-driving robotaxis.

Just because a stock is expensive based on what a company is earning now doesn't inherently mean it's a bad buy. What it does mean, however, is that the investment thesis must be compelling. And investors who are buying stocks in companies for what they could do years from now must be prepared for volatility.

A good example of lofty expectations being baked into a stock's valuation right now is Oracle (NYSE: ORCL), which has increased several fold in recent years. Oracle has what it takes to become the No. 1 cloud for AI by 2031, but that forecast depends heavily on OpenAI scaling its 10-gigawatt data center footprint. To do that, OpenAI will need more capital and cash flow. If plans are delayed, Oracle will be in a bad position because it is spending rapidly to build its multicloud data centers.

Oracle is the kind of stock that could more than double or even triple if it delivers on promises, but it could also be cut in half or worse. It all comes down to bridging the gap between investor expectations and reality. I think Oracle is a great buy for risk-tolerant investors, but it could enter a multi-year slowdown if the AI investment cycle stalls or Oracle loses a few key customers.

Bet on your best ideas

It's a terrible idea to sell positions in excellent companies just because they have gone up in value. But it's also a mistake to buy a stock just because you hope it will go up in value, rather than making a case for why it deserves to go up in value.

In today's red-hot market, there are a lot of stocks that are going up for the wrong reasons, and there are examples of companies that are skyrocketing for the right reasons -- because they are growing rapidly or building a more defined runway for future earnings growth. The goal, as an investor, is to filter out the noise in stock prices to determine which companies can sustain their gains and which cannot.

As concentrated as the Ten Titans are, there's reason to believe that most of them will be worth more three to five years from now than they are today. Sure, a few may be running a little hot and are poised to let out some hot air. But for a company like Nvidia, if hyperscalers keep lining up to buy its chips, its earnings -- and thus its stock price -- will likely be significantly higher years from now.

Now is the perfect time to conduct a portfolio review to ensure you are investing in stocks for the right reasons -- because you know what you own and are willing to stick with companies even if they sell off. Having a long-term mindset and aligning your risk tolerance and financial goals with your stock holdings is especially important when valuations are elevated.

Navigating an expensive stock market

Long-term investors have inherent advantages in the stock market. They aren't banking on a blowout quarter or a dirt cheap valuation. Rather, all they need is for the underlying business to be sound and for the valuation to be reasonable, even a little on the expensive side. A phenomenal company at a somewhat expensive price is better than a good company at an inexpensive price because the phenomenal company will likely grow earnings and justify a higher valuation over time.

So instead of asking if AI growth stocks are poised for a sell-off, the better question is if a company can grow into its valuation over time. By level setting expectations, you can make calculated buying and holding decisions with the market at all-time highs, while also not being caught off guard if there's a sell-off.

Daniel Foelber has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Netflix, Nvidia, Oracle, and Tesla. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.