Why have the big seven tech companies been hit by AI boom doubts?

Their shares have fallen 11.8% from last month’s peak but more AI breakthroughs may reassure investors

The Magnificent Seven—Microsoft, Amazon, Apple, Nvidia, Alphabet, Meta, and Tesla—faced a harsh reality check as their stock prices fell over 10% since July 10. Investors are questioning the return on massive AI investments, leading to a market correction.

AI Investment Doubts

Concerns about whether the enormous AI investments will pay off have hit the tech giants hard. Goldman Sachs and Sequoia Capital Analysts have expressed scepticism, asking if a $1 trillion AI investment will yield sufficient returns. This has led to significant investor anxiety and a drop in confidence.

Sector Rotation and Economic Woes

Investors are shifting focus to other sectors like smaller businesses, banks, and real estate, hoping for benefits from potential Federal Reserve interest rate cuts. This sector rotation and weak US economic data have further pressured tech stocks. Deutsche Bank’s Henry Allen notes that the concentration of these tech giants in the S&P 500 amplifies their market impact.

Mixed Earnings Reports

Quarterly results added to the turmoil. Microsoft’s cloud computing division, crucial for AI, reported lower-than-expected growth. Amazon faced similar issues with its cloud business. In contrast, despite its heavy AI spending, Meta’s strong revenue growth in its advertising segment and Apple’s better-than-expected sales provided some bright spots.

Overvaluation Concerns

Tech valuations had reached 20-year highs, leading to inevitable pullbacks. CFRA Research’s Angelo Zino pointed out that the high expectations for the Magnificent Seven set them up for a fall when results didn’t match the hype. Hedge fund Elliott Management even labelled AI as “overhyped” and suggested Nvidia is in a “bubble.”

Future AI Breakthroughs

Despite the current slump, AI breakthroughs are expected to continue. Companies like Google DeepMind are making significant strides, like achieving record performance in the International Maths Olympiad. However, the cost of these advancements is skyrocketing, with the bill for frontier AI training increasing tenfold annually.

Generative AI’s Economic Impact

Generative AI has yet to demonstrate significant economic benefits at the corporate level. While tools like Microsoft’s Copilot and Anthropic’s Claude have shown promise, large-scale corporate success stories are scarce. Klarna’s AI-powered assistant handling two-thirds of customer service requests is one notable exception, but such examples are few.

The Path Forward

As the tech giants navigate these turbulent times, the market watches closely to see if AI can deliver on its promises or if current skepticism will persist. The ongoing evolution of AI technology and its integration into business models will be critical in determining the future trajectory of these tech behemoths.