Their shares have fallen 11.8% from last month’s peak, but more AI breakthroughs may reassure investors.
The seven major tech companies have entered correction territory this week, with their shares falling more than 10% since their peak on July 10.
It has been a tough week for the “magnificent seven” — Microsoft, Amazon, Apple, Nvidia, Alphabet (Google’s parent company), Meta (Facebook’s owner), and Tesla — which have dominated the US stock market, buoyed by excitement over artificial intelligence (AI) breakthroughs. Last year, these companies accounted for half the gains in the S&P 500 share index. However, doubts about the return on AI investment, mixed quarterly results, a shift in investor focus to other sectors, and weak US economic data have impacted the group over the past month.
Why Have AI-Linked Stocks Suffered?
Concerns have arisen about whether the vast investments in AI by companies like Microsoft and Google will pay off. Analysts at Goldman Sachs and Sequoia Capital have questioned if the significant spending on AI will yield sufficient returns. The Federal Reserve’s potential interest rate cuts have also shifted investor focus to sectors like smaller businesses, banks, and real estate firms, contributing to the “sector rotation” away from big tech.
Henry Allen, a macro strategist at Deutsche Bank, noted that the rising concentration of these companies in US equities impacts the broader market. Fears about the US economy have also influenced global stock markets.
What Has Happened to Tech Stocks This Week?
By Friday morning, the shares of these seven companies had fallen 11.8% from their peak last month. Mixed quarterly results have added to the uncertainty. While Meta and Apple reported strong performance, Microsoft’s and Amazon’s cloud computing divisions showed lower-than-expected growth.
Dan Coatsworth, an analyst at AJ Bell, mentioned that high expectations for these companies have led to significant drops when they fall short. Angelo Zino of CFRA Research pointed out that tech valuations were at 20-year highs, indicating a need for a pullback.
The Financial Times reported that hedge fund Elliott Management warned investors about an AI “bubble,” particularly concerning Nvidia.
Should We Expect More AI Breakthroughs Over the Next 12 Months?
More AI breakthroughs are expected, which might reassure investors. Companies have clear roadmaps with ongoing training for the next generation of AI models. For example, Google DeepMind recently announced a record performance at the International Maths Olympiad.
However, the increasing cost of AI advancements raises questions about long-term financing, even for well-capitalized companies like OpenAI.
Is Generative AI Already Reaping Rewards for Companies Using It?
Generative AI tools like Microsoft’s Copilot and Anthropic’s Claude have helped individuals work more efficiently. However, at the corporate level, there are few significant success stories. Nvidia has benefited by selling hardware, but companies like Klarna have yet to show substantial economic benefits from AI investments. Dario Maisto of Forrester highlighted the challenge of translating AI technology into tangible economic gains.
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