The "Magnificent Seven" tech giants that have led the 2023 stock market rally saw their fortunes diverge in October as earnings, industry narratives, and investor fatigue worked through this group of leaders.

"At this point, you can't look at them as seven stocks together," Interactive Brokers chief strategist Steve Sosnick told Yahoo Finance Live on Tuesday.

Last month, Amazon (AMZN) and Microsoft (MSFT) were the only members of the group to post gains greater than 1% with the Seattle-area giants rising 4.7% and 7.1%, respectively. Both companies reported quarterly results that revealed growth in their cloud units above investor forecasts.

Meanwhile, rival Alphabet (GOOG, GOOGL) saw shares drop more than 5% after downbeat results from its cloud business, while Nvidia (NVDA) lost 6% amid reports the Biden administration could limit AI chip exports to China.

Tesla (TSLA) stock fell nearly 20% after its latest results showed weaker-than-expected profits amid an overall concern about the adoption rate of EVs.

Meta Platforms (META) issued softer-than-expected guidance for the fourth quarter, though the stock finished the month basically flat, rising 0.4%. Apple (AAPL) stock logged a similarly lackluster month, falling 0.3% after a more than 8% drop in September; the iPhone maker will report results on Thursday.

Valuations come under scrutiny

The diverging paths for these names also reflect broader themes weighing on stocks this earnings season.

The bar to please investors when discussing AI has shifted. Both Microsoft and Amazon passed that test, while investors felt "too much AI benefit" might've been embedded into Alphabet's stock, according to Jefferies tech analyst Brent Thill.

Tesla, which has at times been swept up in the AI narrative on the back of self-driving ambitions, has had more near-term concerns like slimming margins and the prospects of its Cybertruck launch catching investor attention.

The shift from seemingly any AI promise lifting the major tech players comes as investors have placed more scrutiny on results across the corporate world this earnings season.

With the Fed's "higher for longer" interest rate outlook looming over the overall trajectory of stocks, investors have again resurfaced a debate over whether the run-up in the Magnificent Seven simply pushed stock valuations out too high.

"There are real risks here," Sosnick added. "These stocks are expensive and it's not like you're taking a risk on a stock that's got a very affordable valuation."

'There's still a lot lacking'

Investors over the last several months have consistently referenced data showing the majority of the S&P 500's gains this year have been driven by this handful of successful stocks, which account for about 30% of the index's market cap.

But this momentum can also work in reverse.

As Bianco Research president Jim Bianco recently pointed out in a post on X, formerly known as Twitter, the Magnificent Seven have helped drive down the S&P 500 since mid-summer highs, just as this group once helped the benchmark index rise more than 20% at one point this year.

Index investors are "going to feel" the divergence of the Magnificent Seven as their outsized weighting in the S&P 500 can direct the index's movement, Charles Schwab chief markets strategist Liz Ann Sonders told Yahoo Finance.

But as Sonders and other Wall Street strategists noted at the start of October, the path toward a "healthier" market rally isn't all about these few winners.

"If you start to see better breadth [outside the Magnificent Seven], I would view that as a positive," Sonders said in an interview on Tuesday.

And there have been signs of a broadening out, though this trend hasn't fully taken shape, Sonders noted.

The Russell 2000 recently hit its lowest level since its October 2022 lows. Financials (XLF) are still down more than 5% this year. And even better-than-expected earnings aren't proving to be a major driver.

"There's a lot that is lacking about what the market has done in the past year and all you have to do is look under the surface of some of those biggest stocks to see what some of those missing links are," Sonders said.

So now as the rising tide of the Magnificent Seven recedes, it's becoming more clear which sectors of the market might have been swimming without a bathing suit during the 2023 rally.

The question now becomes which of these areas are best positioned to regroup.

Josh Schafer is a reporter for Yahoo Finance.

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