The Magnificent 7 stocks are carrying the entire US market on their backs. This could end very badly for Wall Street.
The US stock market had one of its worst days since the 2008 financial crisis as analysts fear a burst of the AI bubble. Both the S&P 500 and the NASDAQ 100 indexes fell over 3% on Thursday, breaking the streak without a 2% drop since 2007.
So far, the S&P 500 had one of its best years in history, breaking record highs over 30 times. Most of the growth was however sustained by big tech stocks, particularly the so-called “Magnificent 7”. This group includes some of Wall Street’s best-performing companies: Apple, Microsoft, Nvidia, Tesla, Amazon, Meta (Facebook), and Alphabet (Google). Their combined market capitalization exceeds $16 trillion, higher than the gross domestic product of the European Union.
With the exception of Tesla, each Magnificent 7 stock rose significantly this year. From the “lows” of Microsoft at +16.90% year-to-date to the historic rise of Nvidia at +123.57% year-to-date. At one point, Nvidia became the world’s highest-valued public company.
Tesla’s stock has been highly volatile this year, initially dropping 40% in value, rebounding after positive Q2 deliveries, and then falling again after CEO Elon Musk failed to meet his promises (again).
In any case, the Magnificent 7 has carried the S&P 500 growth alone, with the remaining 493 companies posting a combined 5.7% growth year-to-date.
Analysts and investors are terrified about this concentration as the fall of one mighty giant could carry the rest of the market with it.
The end of the AI craze?
If the S&P 500 growth was driven by the Magnificent 7, their growth was in turn driven by strong enthusiasm for artificial intelligence. AI has been in every tech and finance guru’s mouth for almost two years, with promises of revolutionary changes akin to the invention of the internet.
However, AI innovation and, most importantly for Wall Street, profitability have been slow to materialize. Alphabet (Google) posted better-than-expected quarterly earnings yesterday, but its stock price collapsed anyway because investors see high R&D expenses for AI without an immediate return.
Nvidia, which was Wall Street’s pupil in the past 18 months, is also worrying investors amid increased US-China tensions. Most of Nvidia’s AI chips are manufactured in Taiwan, a geopolitical hotspot between the world’s two largest superpowers.
“Investors are finally waking up to all that AI spend and realizing it is much more of an expense right now rather than a revenue generator,” said Peter Boockvar at The Boock Report.
That has been the case for every technological innovation in history. Profitability comes years, if not decades, after a new technology is born. Unfortunately, Wall Street has always been deaf to the tune of time.
