Mag 7

We noticed a chart this week discussing active manager performance. In short, not great YTD thus far.

“Just 21.9% of active funds have beaten the market YTD, the worst performance in at least 26 years. This is in sharp contrast to 60.4% and 60.5% seen in 2021 and 2022. This is also well below the average of 42%. By comparison, the century high was 70.8% in 2000, when the Dot-Com bubble popped. The most common reason for underperformance, especially in the large-cap category, is a reluctance to hold tech stocks.”

The last sentence in the above quote really caught our attention, “the most common reason….is a reluctance to hold tech stocks.”

We thought a deeper dive might be necessary.

Let’s start with the benchmark, what are active managers losing to?

The S&P 500 Index. 7 of the top 8 names, excluding AVGO, account for 34.2% of the entire Index.

As you can see from the 4^th column from the right, some of the position sizes are north of 5%. Many of the funds that are “underperforming” may simply have internal position size limits that could be impacting their perfromance compared to the Index itself. According to the Investment Company Act of 1940, no more than 5% of AUM can be invested in securities of a single issuer in order to be qualified as a “Diversified” Fund.

We are not sure if that might be the main reason for the underperformance but it sure does not help.

Obviously it could also simply be by choice that active managers are underweighted these names to the same magnatude as the Index.

If we take a peek at a few of the names they do not look terribly overextended from certain metrics.

Below are a few charts:

White line is Fwd P/E. Blue line is 3 year Average Gross Margin NVDA

AAPL

AMZN

It could be argued the 3 charts above are not unreasonably over extended on a Fwd P/E basis, especially with Gross Margins headed up and to the right. But to be completely fair we had to add this chart of TSLA, we will not even try to explain.

TSLA

The above chart notwithstanding, we think that the underperformance is related to active managers under exposed to the Magnificant 7.

The problem is circular though.

According to our friends at Copilot, 61.7% of US equity assets are managed in passive funds, compared to 38.3% in Active.

And the trend is not the active managers’ friend.

The circularity of this issue is best captured in the message from the chart below, curtesy of Apollo.

Working Americans now allocate an average of $2,358 per year into the Magnificent 7 stocks.

This comes as 71% of 401(k) contributions, totaling $8,580, are going into equities, according to Apollo.

This means roughly 28% of 401(k) assets flow directly into these stocks.

This represents passive capital moving into the Magnificent 7, regardless of outlook.

Bottom line, the battle to outperform the index benchmarks will continue to be uphill without a closer alignment to those benchmarks.


Rare Earths

This market took its fair share of tape bombs this week, the focus at least earlier in the week seemed to be centered around Rare earth minerals.

Natuarally,  plenty of charts and research began to emerge surrounding the topic.

We tried to collect a few that might have some value. The following chart shows how much the U.S. economy relies on rare earth metals and how risky that dependence has become. It measures what could happen to American industries and jobs if the supply of these metals were cut off. The solid blue bars show what happens if 10% of the industries that use them are disrupted, and the striped bars show the impact if 25% are hit.

https://x.com/_Investinq/status/1978335463573188928


A little different angle.

The commentary that accompanied the above chart.

“As a reminder, Byrd and team have been highlighting critical minerals (ie. rare earth, graphite) with their recent note highlighting among “Among critical materials/minerals to consider regarding potential US military dependence on China, we would highlight titanium (especially for submarine production), graphite, magnets (especially rare earth magnets, which are composed of neodymium and praseodymium), cobalt, samarium, dysprosium and terbium”…

Which led us to this chart with respect to US Equity market exposure.

Some scary performance on there!


Update on Electricity demand

2 weeks ago we wrote about Hyper Scalers and the impact they “might” be having on electricty prices.

This chart might help jog your memory.

We noticed a post by Chamath Palihapitiya that alluded to the Bloomberg article above. He had an interesting take on what may transpire going forward when a Hyper scaler proposal plan comes to a friendly neighbohood like your’s.

https://x.com/chamath/status/1978584886329082098

Photocopying a photocopy

What is AI actually consuming on the interenet? Itself maybe?

Oxford researchers just confirmed what we feared: The internet as we knew it is dying. AI content went from ~5% in 2020 to 48% by May 2025. Projections say 90%+ by next year. Why? AI articles cost <$0.01. Human writers cost $10-100. But the real crisis is model collapse. When AI trains on AI-generated content, quality degrades like photocopying a photocopy. Rare ideas disappear. Everything converges to generic sameness. It’s recursive. Today’s AI slop becomes tomorrow’s training data, producing worse output, which becomes training data again.

Charts

A couple of charts we thought notable this week.

IWM

Looks like the DXY might have something to do with that.

Maybe EEM will be the next to see new ATH?

Have a great week!

Best,

Meraki Trading Team