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In a tumultuous week for the “Magnificent Seven of Big Tech”—a group of dominant technology stocks in the US market—investor confidence in artificial intelligence (AI) breakthroughs has taken a hit. Microsoft, Amazon, Apple, Nvidia, Alphabet, Meta, and Tesla, which collectively fueled half the gains in the S&P 500 index last year, are now grappling with doubts about the returns on their massive AI investments.
Mounting Skepticism Around AI Investments
The skepticism around AI investments has been brewing for months. Analysts from Goldman Sachs questioned the viability of a $1 trillion AI investment, while Sequoia Capital estimated that tech companies would need to generate $600 billion to recoup their AI expenditures. Angelo Zino, a technology analyst at CFRA Research, commented, “There is clearly some concern about the return on the AI investments they are making,” although he acknowledged that big tech companies have been transparent about their AI strategies.
Economic Factors and Sector Rotation
Alongside concerns about AI, broader economic factors are also at play. Investors are increasingly speculating that the US Federal Reserve might lower interest rates soon, which has shifted focus towards sectors like smaller businesses, banks, and real estate firms. This sector rotation has further impacted the “Magnificent Seven,” whose stock valuations were already seen as inflated.
Impact on the S&P 500
The collective influence of these tech giants on the S&P 500 is substantial. Henry Allen, a macro strategist at Deutsche Bank, noted, “Given the rising concentration of that group among US equities, that’s going to have an impact more broadly.” The doubts surrounding these tech stocks have consequently weighed down the broader market.
Recent Performance and Quarterly Results
As of Friday morning, the “Magnificent Seven” had seen an 11.8% decline from their peak last month. Quarterly results have been mixed: Microsoft’s cloud computing division reported lower-than-expected growth, and Amazon’s cloud business faced higher spending on AI-related infrastructure. In contrast, Meta’s shares rose due to strong revenue growth, and Apple sales surpassed expectations.
Dan Coatsworth, an analyst at AJ Bell, remarked, “Expectations have arguably become too high for the so-called magnificent seven group of companies. Their success has made them untouchable in the eyes of investors, and when they fall short of greatness, out come the knives.”
Valuation Concerns and AI Hype
The Financial Times recently reported that hedge fund Elliott Management described AI as “overhyped,” suggesting that Nvidia, a major beneficiary of the AI boom, is in a “bubble.” Zino added, “Valuations were getting to 20-year highs and we were due for a pullback, as well as a pause to digest some of the gains we have seen over the past 18 months.”
Future AI Breakthroughs
Despite current skepticism, more AI breakthroughs are anticipated over the next 12 months. Companies like Google DeepMind continue to set new records, such as their recent performance at the International Maths Olympiad. However, these advancements come at a high cost, raising questions about long-term financial sustainability even for well-capitalized companies like OpenAI.
Real-World Applications of Generative AI
Generative AI, which can create text, audio, or images from simple prompts, has found success in bottom-up applications within companies. Tools like Microsoft’s Copilot and Anthropic’s Claude have helped streamline workflows. Yet, there remain few corporate-level success stories. Klarna’s use of an OpenAI-powered assistant to handle customer service requests is one of the few notable achievements.
Dario Maisto, a senior analyst at Forrester, noted, “There is still an issue of translating this technology into real, tangible economic benefit.”
As these tech giants navigate the complex landscape of AI investment and economic shifts, the industry watches closely to see how they will overcome these challenges and continue to innovate.
Source: The Guardian
