Last week, the arrival of the emerging artificial intelligence company, DeepSeek, felt akin to a thunderous bombshell that precipitated a stunning $500 billion plummet in Nvidia's market valuation
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This seismic event sent shockwaves throughout the tech industry, instigating a broader re-evaluation of the sector's futureCompounding this turmoil, Alphabet's disappointing earnings report this morning exacerbated the situation, stirring up fierce scrutiny surrounding its capital expenditures and resulting in its share price witnessing the most significant drop in over a yearThe once-mighty “Big Seven”—a cohort that historically dominated market trends—seems to be faltering, compelling a deeper consideration of the tech industry's trajectory.
Beneath these waves of turmoil lies a fundamental concern: the sustainability of the unprecedented capital that has poured into artificial intelligence over the last two years
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This influx, spearheaded by major tech giants in search of the next big technological revolution, has been a significant propellant for the strength of the U.Sstock marketHowever, despite this rampant investment and innovation spree, questions now loom over whether such spending will ultimately yield substantial returnsThe answer to this inquiry bears directly on the future trajectories and market values of these technology titans, stoking anxiety amongst a multitude of investors.
So far, five out of the “Big Seven” companies have reported their earnings, with Amazon set to announce its financial results after Thursday's trading, while Nvidia is expected to follow later this monthAmong these reported results, Alphabet's performance stood out as particularly alarming
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Long regarded as a quintessential indicator of the AI boom, expectations surrounding its cloud computing division were highAlas, the fourth-quarter results failed to meet market anticipations, leaving investors disillusionedAs of publication, shares of Alphabet plummeted 7.5% in pre-market trading, a decline that not only poses a severe blow to the company itself but also pulled down the Nasdaq 100 index futures by 0.6%. This scenario underlines Alphabet's significant standing within the tech market and demonstrates the profound influence its performance has on the overall market.
The “Big Seven” holds a pivotal role in the S&P 500 index, responsible for roughly one-third of its weightOver the past two years, their innovation prowess and market sway account for over half of the index's gains
However, as their investments in technologies like artificial intelligence spiral upward, profit growth appears to diminish—a troubling sign that has set off alarm bells in the marketplaceContinuous high expenditure, if insufficiently converted into profit increases, poses potential threats to both the long-term sustainability of these enterprises and their market valuations.
This cloud of anxiety looms ominously over the already inflated valuations of the “Big Seven.” Based on forward price-to-earnings ratios, their share prices command a 40% premium over the S&P 500 indexDespite this premium narrowing from a peak in 2023 by 70%, it remains at a concerning heightSuch a situation suggests that investors harbor elevated expectations regarding the future profit growth of these giants
Should they fail to hit projected profit targets, substantial downward pressure could bear upon their respective share prices.
According to data compiled by Bloomberg Intelligence, the year-on-year profit growth for major corporations peaked at the end of 2023 and is projected to decline for the fifth consecutive quarterThis information reinforces market concerns over the profit growth outlook of the “Big Seven.” Andrew Lapthorne, head of global quantitative research at Societe Generale, has conducted deep analysis in this regard, stating, “The contrast between the capital expenditures and cash flow growth of the Big Seven and other S&P 500 constituents is quite stark.” In 2024, the capital expenditures of the largest seven firms are expected to grow year-on-year by 40%, whereas the growth for all other S&P 500 companies is merely 3.5%. Alphabet has signaled an anticipation of capital expenditures reaching $75 billion in 2025—well surpassing analyst expectations of $57.9 billion
Such massive outlays, if not correlated with proportionate revenue growth, could yield dire consequences for these companies' fiscal health and market credence.
In addition to internal profit growth dilemmas, the “Big Seven” also face considerable pressures from external factorsIntensifying trade tensions have injected a new level of uncertainty into the global market, presenting formidable challenges for tech giants reliant on international operationsConcerns of geopolitical strife can also adversely affect the growth trajectory of tech firms, especially with the emerging trend of stringent regulations in various countries potentially restricting operational flexibility and innovative pursuitsMoreover, the sudden emergence of DeepSeek has drawn a sharp focus on competitive pressures facing these established players
As a formidable new force within the AI sphere, DeepSeek is rapidly carving a niche for itself, threatening the market share of traditional incumbents.
In response to these unfolding scenarios, investors are increasingly scrutinizing other components within the U.Sbenchmark indices for potential growth opportunitiesChristian Heugh, a manager at Morgan Stanley’s global opportunities fund, noted that year-on-year profit growth for the “Big Seven” is “plummeting”, contrasting with an improving profit growth trajectory for other constituents of the S&P 500. This statement reflects a significant shift in investment strategies amongst market playersHistorically, holding stocks from the “Big Seven” was critical for fund managers striving to keep pace with benchmarks; however, this may not hold true in the future
Heugh further emphasized that although these companies are undeniably high-value, they might not represent the ideal avenue for generating alpha, signaling a growing reevaluation of the investment worth of the “Big Seven.”
The recent setbacks for the “Big Seven” have sparked profound introspection regarding the future trajectory of the technology sectorAmidst the rapid strides of artificial intelligence development, these tech giants stand at a crossroads, enriched with unprecedented opportunities yet burdened by formidable challengesTo navigate successfully through high capital expenditures while achieving profit growth, and to adeptly maneuver through fierce competition and complex external environments, represents the crucial challenges they must address moving forward
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