"Big Seven" Stocks Lose $800B in Market Cap Overnight
On August 5th, the US stock market was rocked by a massive sell-off that sent shockwaves across the investment community. According to data from the London Stock Exchange, the market capitalizations of the so-called “Magnificent Seven” tech giants—including Apple, Tesla, Google, Amazon, Nvidia, Meta, and Microsoft—plummeted by approximately $800 billion. The primary concern driving this downturn was fears that the US economy may be sliding into recession, which compounded investors’ anxieties regarding the extensive investments that tech companies are making into artificial intelligence (AI) infrastructure.
The grim news kept piling up, further spooking market participants. By the end of the trading day, shares of Apple, Tesla, Google, and Amazon had dropped by more than 4%, while Nvidia experienced a decline of about 7%, and both Microsoft and Meta fell around 3%. In a substantial move reflecting these economic concerns, Berkshire Hathaway made headlines by selling off nearly half of its holdings in Apple.
The Philadelphia Semiconductor Index fell sharply by 2.6%, marking a staggering 14% decline over the past three trading days. Nvidia's share price was particularly hard-hit after reports surfaced that design flaws could potentially delay the release of its next-generation chips. Over the past five trading days, Nvidia’s stock has tumbled more than 10%, and in nearly a month its shares have decreased by over 20%. However, despite these recent losses, Nvidia’s stock has doubled in value since the beginning of the year.
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Meanwhile, SoftBank’s stocks plummeted close to 19% during the global sell-off, largely due to subpar performance from companies like Arm. This turmoil resulted in the company's founder, Masayoshi Son, seeing a daily reduction of $4.6 billion in his own wealth. Since last Wednesday, SoftBank’s market value has effectively evaporated by about $28.3 billion, erasing all of this year’s gains.
Compounding issues for tech companies, there have also been ongoing rigorous antitrust investigations. On the same day, a US federal judge ruled against Google for illegal monopolization of online search, a verdict that might lead to a breakup of the company and could potentially transform the online advertising landscape that Google has dominated for years.
From a macroeconomic perspective, the US also revealed a disappointing jobs report last week, prompting Tesla's CEO, Elon Musk, to advocate for Federal Reserve interest rate cuts to stave off economic downturns. These combined factors have significantly weakened the previously optimistic market sentiment driven by AI advancements.
In an investor advisory note, AJ Bell pointed out, “The expectations surrounding the so-called ‘Magnificent Seven’ may be overly optimistic. The success of tech companies has made them seem untouchable in the eyes of investors, but when they fail to meet these high expectations, many shareholders could find themselves effectively ‘stabbed in the back’.”
Following the release of earnings reports from these tech firms, the market was rattled by substantial increases in capital expenditures. Data showed that Microsoft, Amazon, Google, and Meta together increased their capital spending by 50% in the first half of this year, an unprecedented total surpassing $100 billion. Analysts are now projecting that if tech companies maintain their current investment growth rates, AI-related investments from large tech firms could more than double by the end of this year.
This spike in expected capital expenditure suggests that the costs associated with building AI infrastructure could be far greater than investors had previously anticipated, with any returns on investment likely taking much longer to materialize. Jim Tierney, the US growth lead at Alliance Bernstein, stated, “Tech companies are ramping up their investments, but investors remain unclear about the business models and returns from these expenditures. Everything seems to be merely painting a picture of a future vision, and the scale of spending is quite alarming.”
This downturn in tech stocks was merely a spark in a larger global sell-off. YARDENI Research identified several factors that contributed to the market's plunge on Monday: a rapid decline in yen-financing transactions, heightened geopolitical tensions in the Middle East, sharp holdings in tech stocks, and weak job reports and earnings.
An investor from Indiana mentioned, “The economy is indeed weakening, and there have been signs of this for the last few months. However, whether last week’s data was enough to trigger such a massive market crash is still a complicated issue.” This investor believes that there has been an excessive extension in the market's interest in AI-related investments over the past two years, suggesting that any negative news would only amplify market volatility.
“Many investors might be surprised by how such an accomplished group of tech giants could experience such drastic corrections, but that’s what happens when the entire market is selling off,” he explained. “For disciplined investors, this presents an opportunity to rebalance asset acquisitions.”
Amid this turmoil, the need to clear out the bubble and establish long-term investment value has never been more pressing. Mohit Kumar, Jefferies’ chief economist for Europe, outlined in an investment report that “firstly, we believe that positioning is a key driver of recent market trends. The US stock market, especially tech stocks, has been overextended and requires some bubble-clearing. Secondly, our outlook on the US job market remains unchanged; we’ve always been of the opinion that the market will moderate, but will not descend into catastrophe. In this context, risk asset adjustments are not indicative of an impending recession, and such corrections and clean-ups are indeed rational.”
Some analysts who remain bullish on tech stocks contend that the Monday sell-off could actually present a more attractive valuation opportunity for investors looking to acquire shares of major tech firms. “From AI investments, people may find long-term returns,” stated DBS Bank’s China investment director, Deng Zhijian.
Deng further elaborated that second-quarter earnings from tech companies generally performed well, particularly among larger firms. “About 80% of companies in the US S&P 500 reported second-quarter results, with average profits reaching 11%—the best performance in the past three quarters. The likelihood of a soft economic landing appears to be significant, and moderate interest rate cuts are likely the prevailing trend,” he mentioned.
Long-term tech bull Dan Ives from Wedbush Securities, who has been tracking Wall Street tech stocks for 24 years, articulated, “Our strategy is to guide investors through panic and irrational global sell-offs, maintaining ownership of the best tech stocks that drive growth and ultimately emerge as winners.”
Tim Courtney, chief investment officer at Exencial Wealth, analyzed that while the market has recently focused on concerns surrounding inflation, AI, and potential recessions, the most crucial factor remains the Federal Reserve’s interest rates. “The current situation bears a striking resemblance to late 2019, when an inverted yield curve led the market to believe the Fed should cut rates, which resulted in several weeks of severe volatility,” he explained.
A Chinese investor shared with reporters how the rapid fluctuations in the yen exert downwards pressure on Japanese stocks, causing investors to borrow yen to purchase other assets, particularly American tech stocks, to enhance leverage. “Tech stocks saw significant upward trends in the first half of this year, leaving ample room for subsequent sell-offs,” he analyzed. “It may be too early to claim that the economy is slowing down, but perhaps this market crash will pave the way for the Federal Reserve to initiate aggressive rate cuts.”