by Jeran Wittenstein and Ryan Vlastelica
For some time now, there have been plenty of reasons to worry about Big Tech stocks. Stretched valuations after a big run up, heavy spending on artificial intelligence and lofty expectations for future growth. For months, though, none of it seemed to matter.
Something changed in the past week, however. The so-called Magnificent Seven stocks are sliding. A Bloomberg Index tracking the cohort is down almost 12% off its peak, falling into correction territory after it powered the Nasdaq 100 to a record on Feb. 19. Of the seven, only Meta Platforms Inc. is in the green for this year.
It’s not because any of the longer-standing concerns have gotten significantly worse. Combined profits for the group actually came in better than expected in the fourth quarter. Instead, the main culprit is a darkening economic outlook. Growth is looking shaky, inflation appears entrenched and trade policy increasingly dicey. The response from investors has been to sell the winners and ask questions later.
“The earnings weren’t terrible by any means, but there’s little patience and a lot of frustration,” said Jordan Klein, a tech-sector specialist at Mizuho Securities. “People are nervous.”
Klein noted a string of disappointing economic data — on inflation, consumer confidence, and retail sales — along with tariff risk that has recently been thrown into sharp relief. In the face of that kind of backdrop, especially when coupled with multiples that often remain elevated by historical standards, anything that isn’t a blowout is a disappointment.
The cracks are spreading in what has been one of Wall Street’s sturdiest pillars after the tech giants carried the market for most of the past two years, thanks to booming profits and excitement about AI investments fueling the next leg of growth.
Hedge funds aggressively unloaded technology related stocks in February, which as of Feb. 25 was on track to be the second largest month for net selling on record, according to Goldman Sachs Group Inc. Net exposure to Magnificent Seven stocks — Apple Inc., Microsoft Corp., Nvidia Corp., Alphabet Inc., Amazon.com Inc., Meta and Tesla Inc. — is sitting around the lowest level since April 2023, the bank said.
In past periods of economic stress, investors have often flocked to Big Tech for safety thanks to their strong balance sheets, dominant market positions, and massive free cash flows. Their haven appeal has been diminished now because of questions around AI spending and future profit growth, according to Mark Luschini, chief investment strategist at Janney Montgomery Scott.
“This may be a temporary phenomenon, but investors have become jaundiced against the widely held thought process surrounding Big Tech,” Luschini said. “The mood has shifted from one of optimism to one that’s more cautious or outright pessimistic.”
For one, there’s more uncertainty than there’s been in years. President Trump’s tariff policies represent significant risks for companies like Nvidia and Apple that generate a large chunk of revenue from China.
The emergence of China’s DeepSeek also shook assumptions about American dominance in the technology while raising questions about the need to spend so heavily on development. While improved efficiency could ultimately be good for AI companies, it would also mean greater competition and potentially less spending on computing gear.
“DeepSeek should give you pause about AI, and whether all this capex will be reduced,” said Ed Egilinsky, managing director at Direxion Funds. “That has contributed to the reset and re-evaluation within tech, especially the AI-exposed names.”
In the fourth quarter, the Magnificent Seven delivered combined earnings growth of 31% compared with the same period a year earlier, up from projections of 22% at the start of the reporting period, according to data compiled by Bloomberg Intelligence. The selloff has sent the valuation of the Bloomberg Magnificent Seven index to 28 times projected profits, around the average over the past decade and down from 34 times in December. Some components, including Microsoft and Apple, remain at premiums to their long-term averages, however.
Despite the rapid deterioration in sentiment around Big Tech, the shares are unlikely to be under pressure for long, according to Janney Montgomery Scott’s Luschini.
“Eventually we will get to a position where investors will say ‘these names aren’t broken, they’re still best-in-class companies with large competitive moats,’” Luschini said. “It isn’t like they’re likely to be displaced from their positions as major players.”
Copyright Bloomberg News
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