Big Tech stocks are experiencing a harsh summer
The performance of major technology equities continues to deteriorate, making this month particularly unfavorable for them.
The collection of prominent technology giants known as the Magnificent Seven has experienced a significant decline in market value, amounting to $1.52 trillion, during the last three weeks. This decline represents the largest loss over a similar period in recorded history. Last week, Tesla shares had an 8.1% decrease, while Alphabet saw a reduction of 6%. This drop in stock prices was a result of their earnings reports, which caused a significant sell-off in the stock market and raised concerns about the ongoing artificial-intelligence craze that has been driving stock prices to record levels.
Prior to this, traders had already been cautious and uncertain about their investments in large technology companies.
“There is still an element of relying on trust,” stated Yung-Yu Ma, the chief investment officer of BMO Wealth Management. “Currently, the market does not appear particularly willing to accept it without evidence, considering the amount that has already been factored into the prices.”
Technology stocks have been experiencing a decline in value since the beginning of this month. This decline was triggered by a favorable inflation data, which increased traders’ confidence that the Federal Reserve will reduce interest rates in September. This led investors to reduce their bets on the current top-performing companies and quickly invest in smaller companies that are expected to get additional advantages from decreased borrowing expenses.
The information-technology sector of the S&P 500, which includes companies like Apple and Nvidia, has experienced a fall of 9.2% since the release of the inflation data. The communication-services sector, comprising Meta Platforms and Alphabet, has experienced a significant decline of 9.6%. The Russell 2000, characterized by its small-capitalization stocks, has experienced a significant increase of 10%. In contrast, the S&P 500 has shown a slight decline of 3.1%.
Technology stocks will encounter their next assessment in the upcoming days, as other constituents of the Magnificent Seven disclose their financial performance. Microsoft is set to release its financial report on Tuesday afternoon, while Meta is planned to do the same the following day. Thursday will see a particular emphasis on Amazon.com and Apple. Nvidia, the largest contributor to the S&P 500’s performance this year, is set to release its financial report in late August.
Thus far, investors have been disappointed by the initial set of technological outcomes.
Alphabet reported a deceleration in sales growth during the second quarter due to its continued investment of billions of dollars in expanding generative-AI capabilities. Alphabet is the parent company of Google and YouTube. The stock experienced a 5% decline on the following day. Tesla’s profitability suffered a significant decline due to reduced income, as customers paid lower prices for its main models. The stock had a 12% decline in value during the subsequent trading session.
On July 18, Netflix, a non-member of the Magnificent Seven, said that it had continued to acquire new users. However, the company stated that it does not anticipate advertising to be the main factor driving future revenue growth. Additionally, it cautioned that subscriber growth in the third quarter will be slower compared to the previous year. The company’s stock declined by 1.5% on the subsequent day.
Not every technology company has failed to meet investors’ expectations. On Thursday, shares of International Business Machines (IBM) experienced a significant increase of 4.3%, marking their strongest performance since late January. This surge was driven by the fact that the book of business for IBM’s Watsonx generative-AI platform exceeded $2 billion, surpassing the previous quarter’s total of over $1 billion.
Despite their excessively high values, several analysts express concern that tech businesses may face increasing difficulty in impressing investors over the latter half of the year. In addition, there are already indications that the growth of earnings is becoming more widespread, a development that some investors perceive as favorable.
According to Jeffrey Schulze, the head of economic and market strategy at ClearBridge Investments, there are now other opportunities for earnings growth outside the Magnificent Seven.
According to statistics from FactSet, it is projected that earnings for companies in the S&P 500 would increase by 9.8% this quarter compared to the same period last year. John Butters, a senior earnings analyst at FactSet, predicts that the absence of the Magnificent Seven would result in a 5.9% increase in profits for the remaining companies in the index.
Although there has been a recent decline in the value of IT stocks, they still appear to be expensive. According to FactSet, Tesla’s predicted earnings for the next 12 months are valued at 78.3 times its current trading price, while Nvidia’s projected earnings are valued at 35.5 times. The price-to-earnings ratio of the S&P 500 is 20.7.
The elevated valuations of these enterprises may enhance the attractiveness of smaller firms.
Ivana Delevska, founder and chief investment officer of Spear Invest, stated that mega-caps are relatively pricier compared to other companies on the market. “The initial increase was primarily driven by them, but they will face challenges in keeping pace with the smaller companies during the latter part of the year.”
