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Four of the so-called “Magnificent Seven” technology stocks which have driven the rally in US markets over the past nine months ended the week in correction zone after falling greater than 10 percent from their recent highs.
Another two – Microsoft and Amazon – are on the verge of correction-defining double-digit declines. Investors are awaiting more earnings reports from tech firms next week, nervous about high valuations and the chance that returns from huge spending on artificial intelligence may not meet initial expectations.
Nvidia and Tesla are each down 17 percent from their recent highs, while Meta and Google parent Alphabet are down 14 percent and 12 percent, respectively. Apple is the most effective performer of the group, down just 7 percent, while Microsoft and Amazon are each down about 9 percent.
On Wednesday, Alphabet sparked a broader market sell-off when the corporate's shares fell greater than 5 percent on concerns about AI-related investments despite reporting solid quarterly results. Alphabet's quarterly capital expenditures totaled $13 billion, nearly double what they were a 12 months ago.
“For an extended time, investors were sold on the premise that investing in AI – spending money – is inherently good,” says Max Gokhman, senior vp at Franklin Templeton Investment Solutions. “Now we're seeing … investors saying, 'Wait a minute, what are the productivity gains here, and when do you expect them?'”
Alphabet's decline helped the tech-heavy Nasdaq Composite record its biggest each day loss in 18 months on Wednesday: 3.6 percent. The index ended the week down 2.1 percent.
Next week's quarterly results from Microsoft, Meta, Apple and Amazon could represent one other test of investor confidence within the AI story, which has been a key driver of market gains.
“Expectations are high and valuations for the Mag Seven will not be low. We are also approaching the purpose where we’ll see a decline in returns from them as a bunch – from the beneficiaries of AI basically,” said Josh Nelson, head of U.S. equities at T Rowe Price.
Investors also showed this week that they’re willing to punish firms that fail to fulfill expectations. Tesla fell 12 percent on Wednesday after declining sales and its own spending on AI caused profits to shrink greater than expected. And Ford shares plunged 18 percent on Thursday as the corporate's earnings fell in need of expectations on account of higher-than-expected warranty costs.
According to FactSet data, firms that missed expectations saw their stocks fall a mean of three.3 percent in the times surrounding their earnings releases, greater than the five-year average of two.3 percent.
Companies that beat expectations didn’t, on average, see share price increases, FactSet reported.
“The trend of penalizing failure greater than rewarding success is becoming more evident,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “There is uncertainty and nervousness about how briskly the market has actually grown, driven by these names, with no corresponding improvement of their future earnings prospects.”
Sonders also noted that the present earnings season coincided with a “rotation” amongst investors who took profits on the biggest technology firms and as an alternative supported smaller firms that might be more more likely to profit greatly if the Federal Reserve began cutting rates of interest in September.
This week, the small-cap index Russell 2000 rose 3.5 percent, while the blue-chip index S&P 500 fell 0.8 percent.
