Recently, the Mag 7 stocks experienced a significant decline, causing turbulence in the U.S. stock market. The downturn, spurred by their earnings reports, wasn't due to poor results but rather because the earnings weren't as stellar as expected. Technology, semiconductor, and AI concept stocks collectively fell, with the Nasdaq dropping by 2.76%, marking its largest decline in nearly two months.
The "Big Tech 7" saw all their stocks fall: Meta (META) declined by 4.09%, Microsoft (MSFT, Financial) by 6.05%—its largest single-day drop in two years, NVIDIA (NVDA) by 4.72%, Alphabet's Google (GOOGL) by 1.92%, Tesla (TSLA) by 2.99%, Apple (AAPL) by 1.82%, and Amazon (AMZN) by 3.28%.
Despite the fall, expert analysis indicates that the declines weren't due to poor reports. On the contrary, revenue and profits exceeded expectations. However, these companies' current stock prices and valuations mean their performance forecasts did not satisfy the market.
This week saw a flurry of tech earnings reports. Google's reported cloud revenue growth exceeded expectations, alleviating some investors' "AI anxiety." However, Microsoft's and Meta's subsequent reports dampened the mood. While both companies exceeded expectations in revenue and profit, Microsoft's guidance for Q4 AI revenue and spending alarmed investors. Microsoft forecasts that Azure revenue growth will slow to 31%-32% in Q4, following a nearly 79% year-on-year increase in capital expenditure in Q3, with expectations of further sequential growth in Q4.
Meta's report also heightened concerns about over-investment in AI with insufficient returns. Reality Labs, responsible for Meta's metaverse and AI operations, reported a significant $4.42 billion loss in Q3. Despite this, Meta plans to continue substantial investment in AI, predicting a "significant" increase in capital expenditure by 2025.
Michael Arone, the Chief Investment Strategist for State Street Global Advisors' U.S. SPDR business, noted that while these companies continue to deliver strong revenue and profit results, their guidance does not meet market expectations given their current price and valuation levels. He suggests the pullback in large tech stocks may persist due to certain risk factors.
