Historic rotation in the US stock market has begun, and technology stocks that have been advancing vigorously have encountered Waterloo again this week.

On Wednesday, July 24th local time, the seven tech giants including Apple suffered their darkest moment, with a single-day market capitalization evaporation of $768 billion, the largest single-day decline since October 2022, and also the biggest blow to technology stocks since the ChatGPT AI market explosion. Technology stocks were the main cause of the fall, with the index dropping more than 3.6%, the largest single-day drop since the end of 2022.$Alphabet-C (GOOG.US)$,$Apple (AAPL.US)$,$Microsoft (MSFT.US)$,$Meta Platforms (META.US)$From the performance of the week, all seven giants have fallen this week, with a total market value shrinkage of about $2 trillion since July 10th. In fact, before the current sell-off, the analysis of the "AI bubble theory" had been heating up in the market, with many investment banks launching bearish comments and questioning whether the massive investment in the AI field can bring corresponding returns in the future.$Nasdaq Composite Index (.IXIC.US)$"The Seven Giants" suffered a rare setback, which may become a turning point for a new wave of AI. Next week, technology giants such as Microsoft, Apple, and Meta will release their financial reports, and the market may face even greater challenges.

Perspective on Google's financial report: the growth of AI business is hard to match with huge expenditure.

For Wall Street investors, July 24th local time was the most thrilling trading day from the beginning of the year to now: the seven giants of the US stock market which have surged in the past two years, fell into the biggest single-day decline since October 2022, and officially fell into the 10% callback range, with the total market value evaporating over $1.1 trillion.

Tech stocks have encountered this "plunder" because the market has realized that despite the high costs and inputs made during this spectacular AI narrative, which has been going on for nearly two years, it seems that no path has been found to achieve returns matching the investments. Alphabet, the parent company of Google, released its second quarter financial report, which shows that the revenue growth of two AI-related business areas, Google Cloud and Search, did not show a steady upward trend in the past year, and the growth rate was insufficient to match the R&D investment of Google. Therefore, although the performance was better than expected, Google fell more than 5% on the 24th, marking the worst performance in six months and fell another nearly 3% the next day.

The main business of Google includes Google search, YouTube advertising, Google services, and Google Cloud. The businesses closely related to AI are search business and cloud business.

On the premise of the trend of deep decline of the seven giants due to poor performance in the second quarter of this year, the US stock market as a whole suffered its largest single-day decline since October 2022, and the total market value evaporated by more than $1.1 trillion throughout the day. Among them, Tesla fell more than 12%, and Apple suffered the smallest decline, about 2.9%.$Tesla (TSLA.US)$From the week, all seven giants fell, and the total market value shrunk by about $2 trillion since July 10th, the largest decline since October 2022.

As a frontier technology, the semiconductor sector has become the object of market favoritism.$S&P 500 Index (.SPX.US)$The main reason for the surprise attack on technology stocks was that the market realized that despite the high cost and investment made during this spectacular AI narrative, which has been going on for nearly two years, it seems to have found no path that can achieve returns matching the investment.

After the US stock market post-market trading on July 23, Alphabet, the parent company of Google, released its second quarter financial report, which shows that the revenue growth of two AI-related business areas, Google Cloud and Search, did not show a steady upward trend in the past year, and the growth rate was insufficient to match the R&D investment of Google. Therefore, although the performance was better than expected, Google fell more than 5% on the 24th, marking the worst performance in six months and fell another nearly 3% the next day.

The seven giants of the US stock market have encountered Waterloo again this week with a high profile AI narrative and high cost investments of nearly two years. The core lies in the fact that despite the high costs and inputs made in recent years, no path has been found to achieve returns matching the investments. Alphabet, the parent company of Google, released its second quarter financial report, which shows that the revenue growth of two AI-related business areas, Google Cloud and Search, did not show a steady upward trend in the past year, and the growth rate was insufficient to match the R&D investment of Google. The stock market may face greater challenges in the future, as Microsoft, Apple, and Meta will also release their financial reports in the same week as Google. When the AI field earns returns matching the investment still remains to be seen. Future earnings from AI are still uncertain.

The main business of Google includes Google search, YouTube advertising, Google services, and Google Cloud. The businesses closely related to AI are search business and cloud business.

By carefully analyzing the revenues of the past few quarters and comparing them with R&D expenditures, it can be observed that the revenues of Google Cloud and search business have not been steadily increasing, and their growth rates are far from matching the increase in R&D investment in the past year.

It is reported that Alphabet invested $2.2 billion in DeepMind and Google's search department in the second quarter of this year to build AI models, which is higher than $1.1 billion in the same period last year. But it is still unknown when AI will start generating revenue for cloud services or even advertising businesses.

Although Alphabet did not disclose the specific proportion of the total R&D investment in AI in its financial report, a recent environmental report released by Google revealed the huge scale of its AI expenditures. In 2023, in order to expand AI data centers, the company's carbon dioxide emissions will increase by 13% compared to 2022.

Not only that, Alphabet plans to invest at least $12 billion per quarter by the end of 2025, even if this may affect its profit margin. Google CEO Sundar Pichai emphasized on the earnings call that the risk of insufficient investment is far greater than that of excessive investment.

In addition to Google, OpenAI has also been reported by foreign media to be possibly losing $5 billion this year. The company's estimated full-year revenue is between $3.5 billion and $4.5 billion, but total costs may reach as high as $8.5 billion.

Goldman Sachs analyzed the heavy investments in AI infrastructure by tech giants in a report on June 27, including investments in data centers, chips, other AI infrastructure, and the power grid. However, these investments have shown little apparent effect so far.

David Cahn, a partner at Sequoia Capital, also pointed out that the technology industry needs to create around $600 billion in annual revenue to cover all AI investments, but this number has not yet been reached.

Is the "AI bubble" bursting faster? Wall Street debates.

As leaders of the generative AI wave, Google and OpenAI's AI revenue challenge has also exacerbated Wall Street's concerns about whether AI can be a driver of growth.

It should be noted that the "AI bubble theory" has been around for some time before this market's significant adjustment. Some believe that the rapid development of AI has created a bubble, adding $9 trillion to the S&P 500 index in the past year.

Earlier this year, Morgan Stanley issued a warning that the strong performance of the stock market at the end of 2023 had pushed stock valuations to potentially unsustainable levels. Current expectations for P/E ratios and low equity risk premiums suggest limited upside for investors and increased risk.

According to London Stock Exchange data, the P/E ratio of the S&P 500 index is close to 22 times expected earnings, the highest level in more than two years and well above the average level of the past decade (18 times). While the recent dramatic drop in tech's 'Seven Giants' may not be the start of a bubble burst, the huge drop is exacerbating investor concerns.

According to Morgan Stanley and Goldman Sachs, hedge funds have been reducing their exposure to US stocks over the past two weeks, fearing that sentiment around tech stocks could change and may wipe out earlier gains this year. On July 25, Morgan Stanley said computer-driven macro hedge funds sold $20 billion of stocks on Wednesday and expected to sell at least $25 billion in the next week, one of the largest risk-off events in a decade.

Accelerated by the rotation of tech stocks, the shift in market sentiment is also one of the factors exacerbating the recent market decline. Last week, demand for put options exceeded call options, reaching a five-month high. In addition, some analysts believe that the recent headwind on tech stocks is also due to the rapid increase in expectations for Fed rate cuts, which has accelerated capital outflows from US stocks.$NVIDIA (NVDA.US)$However, other analysts believe that the market's response is excessive and more short-term volatility. They believe that in the upcoming US stock earnings season, Wall Street will better digest the performance of tech giants and the broader development trend of AI technology.

"While investors may worry about the massive spending spree and be disappointed about the profit growth rate or profit margin that these huge investments may bring... we strongly object to this pessimistic view because the spending spree further confirms the existence of the AI revolution." Dan Ives and his team of Wedbush analysts wrote in an investor report.

Wedbush also reiterated its bullish position on US tech stocks, once again predicting that the Nasdaq Composite, with tech stocks as its core, will rise another 15% to 20% by the end of this year.

The chief investment officer of Truist also expressed a similar view, writing in a report that "although technology stocks are currently experiencing a pullback after their strongest two-month performance since 2022, the long-term bull market is expected to remain intact."

Dan Coatsworth, an investment analyst at investment platform AJ Bell, believes that Microsoft, Meta, Apple, and Nvidia will release their earnings next week, and Nvidia will release its financial report at the end of August. After the data is released, it may be possible to know whether a necessary adjustment to eliminate the bubble is required.

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