Hedge funds are trimming their Magnificent 7 holdings — here's what they're buying instead

• While the Magnificent Seven dominated in 2024, hedge funds are starting 2025 differently.
• According to Goldman Sachs, institutional investors are cutting back on Big Tech and financials.
• They're buying healthcare and communication services stocks instead.

Hedge funds are making some adjustments to their tech-investing playbook.

The Magnificent Seven stocks — which include Apple, Amazon, Tesla, Microsoft, Nvidia, Alphabet, and Meta — contributed over 50% to the S&P 500's gains last year, but the biggest money managers in the market are increasingly looking to different parts of the market, according to Goldman Sachs' analysis of 695 hedge funds with $3.1 trillion of gross equity positions at the start of the first quarter of 2025.

Despite remaining top holdings in Q4 of 2024, all of the Magnificent Seven stocks saw a net decrease in hedge fund ownership except for Tesla.

The Magnificent Seven stocks have struggled so far this year. The group's year-to-date return has lagged behind the overall S&P 500 index, with every stock in the Magnificent Seven down in 2025 while the index is up 2.5%.

One explanation for the underperformance is that the market is still trying to appropriately quantify DeepSeek's impact. The Magnificent Seven is planning to continue its aggressive AI capex spend for a total of $280 billion in aggregate expenditures, up 34% year over year. Investors are increasingly scrutinizing if those dollars are resulting in tangible results, especially when DeepSeek uses a fraction of the cost.

"Price reactions suggest growing concerns around monetization vs. capex for hyperscalers, with Meta the only one rising on earnings," Savita Subramanian, head of US equity and quantitative strategy for Bank of America, wrote in a recent note.

Here's what hedge funds are buying instead

While the Magnificent Seven stocks are still hedge funds' largest holdings, the funds have increased their exposure to the healthcare and communication services sectors, upping their existing overweights by 135 and 118 basis points, respectively, last quarter, Goldman Sachs said.

Healthcare stocks underperformed in 2024, gaining just 2%, but they've had a strong start to 2025, with the sector up 6% year to date. The sector is sensitive to government regulation, so it could be in for some volatility in 2025 if existing healthcare policies change, the bank said.

Goldman Sachs identified UnitedHealth Group (UNH) as one of last quarter's "Rising Stars," or stocks with the largest increase in the number of hedge fund investors. In communication services, Walt Disney Company (DIS) was another Rising Star.

Hedge funds are still bullish on AI, but instead of only focusing on the Magnificent Seven, they're turning to "Phase 3," or companies with AI-enabled revenues. As the technology develops more use cases, the biggest winners will be the companies that use AI to boost productivity and grow revenue streams. Salesforce (CRM) and ServiceNow (NOW) were the top AI Phase 3 stocks among hedge funds last quarter, according to Goldman Sachs.

Hedge funds also adjusted holdings last quarter to take advantage of the Trump trade, meaning they moved to cut back on stocks exposed to China and tariffs. Instead, hedge funds added potential deregulation beneficiaries and companies exposed to small businesses and domestic sales. The natural gas processing business Williams Companies (WMB) appeared on the Rising Stars list.

While investors are exercising increased caution around the Magnificent Seven and financials, that doesn't mean that hedge funds are jumping ship entirely on those trades: Tesla (TSLA) and Robinhood Markets (HOOD) made the Rising Stars list. Especially within financials, while hedge funds may have cut back on their overall sector allocations, certain individual stocks did well. Hedge funds also believe Stifel Financial Corp (SF) is shaping to be a potential deregulation beneficiary under Trump.