The AI Build-Out: Who's Paying, Who's Profiting

Two sides of the AI Build-Out. The picks and shovels remain dependable; the platforms become worthy of a second look

The Magnificent 7's leadership has faded .— The seven make up roughly a third of the S&P 500 (about 32.7% in mid June), so their moves swing the whole index. They peaked on 29 October 2025, when their combined value crossed $20 trillion, and have since fallen more than 10% while the rest of the market held broadly steady. The cause isn't weak businesses — 2026 earnings forecasts have largely held up — but growing investor doubt over whether the group's enormous AI capex will earn an adequate return.

Meanwhile, the suppliers to the build-out have kept compounding. The picks and shovels of this cycle sit in specific subsectors: foundry (TSMC), memory and storage (Micron, SK Hynix, WesternDigital), equipment (Applied Materials, Lam Research, ASML), networking and custom silicon (Broadcom, Arista), and optical components (Lumentum, Coherent). The Philadelphia Semiconductor Index has surged over 65% year-to-date, and Broadcom has overtaken Meta and Tesla by market value.

The two sides are connected. The spending testing investors' patience with the Mag 7 is the suppliers' revenue. The group put an estimated $320 billion into AI last year, and budgets keep rising — Amazon alone is guiding capex up 56% to $200 billion in 2026. Every dollar flows down the chain: to the foundries, memory makers, equipment firms and networking suppliers that build and connect the data centers.

The pullback has left the Mag 7 at a rare valuation. They trade near 25x forward earnings versus ~22x for the S&P 500 — the lowest premium to the rest of the market in a decade — while profits are still set to grow about 18% in 2026 versus ~13% for the rest. Meta now trades below the index itself, at ~18.3x forward. Faster grow that a shrinking premium is a combination this group has rarely offered.

Ionic View

Our approach through the AI cycle has been to own the layer that gets paid for the build-out — the foundries, memory makers, equipment firms and networking and optical suppliers — rather than the platforms funding it. We continue to see this picks-and-shovels layer as the most dependable expression of the AI theme. At the same time, the Mag 7's derating to its smallest premium in a decade — faster growth for a shrinking multiple — has restored genuine selective value in the platforms, and we see the two as complements: the enablers for the build-out, and the platforms for the payoff.