Four of the so-called Magnificent Seven technology stocks that have driven the US market rally for the past nine months ended the week in correction territory, having fallen by more than 10 percent from recent peaks.
Two others — Microsoft and Amazon — are nearing the double-digit declines that define a correction. Investors are now looking ahead to further tech earnings updates next week amid concerns about high valuations and the risk that returns from significant artificial intelligence-related spending may not meet early expectations.
Nvidia and Tesla have each dropped 17 percent from their recent peaks, while Meta and Google parent Alphabet have fallen 14 percent and 12 percent, respectively. Apple has been the best performer in the group, losing only 7 percent, while Microsoft and Amazon have slid about 9 percent each.
On Wednesday, Alphabet triggered a broader market sell-off when its shares fell more than 5 percent, despite reporting solid quarterly operating numbers. Concerns about AI-related investments were cited, with its $13 billion quarterly capital expenditure almost double that of a year ago.
“For a long time, investors were really sold on the premise that AI investment in and of itself — spending money — is good,” said Max Gokhman, a senior vice-president at Franklin Templeton Investment Solutions. “What we’re seeing now is investors saying, ‘Hold up a sec, what are the productivity gains here, when do you expect to see them?’”
Alphabet’s decline helped drag the tech-heavy Nasdaq Composite to its worst one-day decline in 18 months on Wednesday, down 3.6 percent. The index ended the week down 2.1 percent.
Earnings reports from Microsoft, Meta, Apple, and Amazon next week may set up a fresh test of investor faith in the AI narrative that has been a crucial driver of market gains.
“Expectations are high and valuations for the Magnificent Seven aren’t cheap. We’re also closer to the point when we see some deceleration in earnings from them as a group — from the beneficiaries of AI in general,” said Josh Nelson, head of US equity at T Rowe Price.
This week, investors also showed they were prepared to punish companies that missed expectations, with Tesla losing 12 percent on Wednesday after slowing sales and AI spending reduced profits more than anticipated. Ford shares tumbled 18 percent on Thursday when its profits fell short due to unexpectedly high warranty costs.
On average, companies that missed expectations saw their shares drop 3.3 percent in the days surrounding their earnings, according to data from FactSet, more than the five-year average of 2.3 percent. Companies that beat expectations saw, on average, no gains in their share price, FactSet reported.
“The trend of misses getting punished more than beats getting rewarded is becoming more significant,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “There is uncertainty and skittishness regarding just how fast the market, driven by those names, ran, without the commensurate improvement in their forward earnings prospects.”
Sonders also pointed out that the current earnings season coincided with a “rotation” among investors, who are taking profits in the biggest tech names in favor of smaller companies that are more likely to benefit if the Federal Reserve starts cutting interest rates in September.
This week, the Russell 2000 index of small-cap stocks added 3.5 percent while the blue-chip S&P 500 fell 0.8 percent.