Large technology companies are facing a profit test. The seven major tech giants lost nearly 1 trillion US dollars in market capitalization last week, and market anxiety is rising.
Strong profits from big tech companies have been driving the stock market higher for more than a year. This time, the sharp decline increased the pressure on the performance of the Big Seven.
The total market value of the “Big Seven” shrunk by 950 billion US dollars last week, the highest in history. Microsoft (MSFT.O) fell 5.4% last week, the weakest since January 2023, while Nvidia (NVDA.O) fell 13.59%, the worst week since September 2022. Although the stock market rose on Monday, the S&P 500 index has fallen 4.6% so far in April.
This week, several giant companies, including Tesla (TSLA.O) and Microsoft, will release earnings reports, providing the next opportunity for the stock market to regain its foothold.
Investors are fond of tech stocks because they generally have excellent growth prospects. According to FactSet's analysts, the IT industry's earnings for the first quarter are expected to grow 20%. They expect the communications services industry, including Meta Platforms (META.O) and Alphabet (GOOGL.O), to grow 20%. S&P 500 earnings are expected to increase by 0.5%.
The fate of the Big Seven is significant. According to data from S&P Dow Jones Indices (S&P Dow Jones Indices), as of the end of March, “Big Seven” stocks accounted for 29% of the market value of the S&P 500 Index, which more than doubled on average in 2023, the highest concentration in decades.
Naelfakhry, co-chief investment officer at Osterweis Growth and Income Strategy, said, “If you own US stocks, you can't ignore these companies.”
Tesla is scheduled to release earnings after the US stock market today. Facebook's parent company MetaPlatforms will release earnings on Wednesday, while Microsoft and Google's parent company Alphabet will release earnings on Thursday afternoon. Amazon (AMZN.O) and Apple (AAPL.O) will release earnings next week.
Technology stocks are benefiting from a rise in enthusiasm for artificial intelligence technology and the belief that the US economy will achieve a soft landing, which means that Fed policymakers can curb high inflation without triggering a sharp economic slowdown. This situation will prompt the central bank to cut interest rates, thereby boosting the stock market.
Now, that prediction is being questioned. In the 12 months to March, consumer prices rose 3.5%, which has been higher than expected for three consecutive months. Federal Reserve Chairman Jay Powell said last week that central bank officials are not ready to cut interest rates. The 10-year Treasury yield (the benchmark interest rate for stocks to mortgages) closed at 4.622% on Monday, up from 4.192% on March 28.
“Interest rates seem to remain high for the foreseeable future, and I think this will dampen the valuation of the entire market,” Fakhry said. His fund holds shares in Microsoft, Alphabet, and Amazon.
According to FactSet, Amazon's expected earnings for the next four quarters are 38 times, while Tesla's earnings are expected to be 48 times higher. The S&P 500 is trading at 20 times the price.
In a Bank of America survey of fund managers last week, more than half of the respondents said that holding “Magnificent Seven Flags” shares was the “most crowded” transaction on Wall Street. Many investors believe that this flock effect indicates limited room for future growth.
Bob Kalman, co-founder and senior portfolio manager of Miramar Capital, said the major failure of market leaders could put the stock market at greater risk of sell-off. Other sectors of the stock market, such as industrial stocks and financial stocks, have better value, he said.