The magnificent seven, a group of technology stocks that has dominated the US stock market, has experienced a tough week as doubts about the return on artificial intelligence (AI) investments, mixed quarterly results, and weak US economic data have taken their toll. Microsoft, Amazon, Apple, Nvidia, Alphabet (Google’s parent company), Meta (Facebook’s owner), and Tesla have collectively moved into correction territory, with their combined share prices falling more than 10% since their peak on 10 July.
Concerns about the profitability of the vast AI investments made by Microsoft, Google, and others have been a primary factor in the recent stock market turbulence. Goldman Sachs analysts have questioned whether the estimated $1tn investment in AI over the next few years will “ever pay off,” while Sequoia Capital has estimated that tech companies will need to earn $600bn to recoup their AI investments.
Investor expectations of a potential interest rate cut by the Federal Reserve have also contributed to the shift in focus towards sectors such as smaller businesses, banks, and real estate firms. This “sector rotation” has further impacted the big seven tech stocks, given their significant influence on the S&P 500 index.
Quarterly results from the tech giants have been mixed. Microsoft and Amazon’s cloud computing divisions, which play a crucial role in AI model training and operation, reported lower-than-expected growth. However, Meta’s strong revenue growth and Apple’s better-than-expected sales have provided some relief.
Despite the recent setbacks, more AI breakthroughs are expected over the next 12 months, which may reassure investors. Google DeepMind’s record performance on the International Maths Olympiad has raised hopes for tackling long-unsolved problems in the near future. However, the rapidly growing cost of frontier AI training runs remains a concern for even well-capitalised companies like OpenAI.
The most successful uses of generative AI within companies have come from individuals who have found ways to work more efficiently using tools such as Microsoft’s Copilot or Anthropic’s Claude. At a corporate level, however, there are few stark success stories, with Klarna’s AI-powered customer service assistant being a notable exception. The lack of economically beneficial uses for generative AI is hampering the investment case, according to Dario Maisto, a senior analyst at Forrester.
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