The Magnificent 7 technology stocks stumbled slightly towards the end of the week, as the companies in the group – which includes Microsoft, Meta, Amazon, and Google’s parent Alphabet – delivered mixed quarterly earnings reports.
The Mag 7 makes up more than a third of the value of the S&P 500, with chip maker Nvidia this week becoming the world’s first US$5 trillion ($8.7tr) company by market capitalisation.
Meta shares dropped by up to 9% after it reported an earnings and revenue beat on Wednesday (US time), albeit with a US$15.9 billion one-time tax charge resulting from US President Donald Trump’s One Big Beautiful Bill Act.
Google also beat expectations on strong YouTube advertising and cloud revenue for its third quarter, topping US$100b in quarterly revenue for the first time. Its share price reacted positively.
Microsoft fell 4% on the day of its results, even though it beat expectations. The company’s Azure cloud platform may have experienced a serious global outage during the week, but it reported US$30.9b in revenue for the three-month period – up 28% on the same period a year ago.
But it was the company’s forecast of accelerating capital expenditure throughout the rest of the financial year that may have spooked investors, even if it is spending to support its AI growth plans.
That’s a path all companies in the position to capitalise on artificial intelligence will be taking to try and remain competitive in a swiftly moving environment.
Amazon, with its Amazon Web Services business, may be seen as a laggard on AI, but it still beat earnings expectations, reporting a 38% increase in profit for the quarter on Friday (NZ time), and prompting a circa-10% surge in after-hours trading activity.
High tech vs high street
ASB chief investment officer Frank Jasper has spoken to NBR about the 'Mag 7' market concentration in the past, and said the situation was only getting more out of whack as he sees the hype around tech investments diverge from the reality on the US high street.
He pointed to the contrast with US fast casual restaurant chain Chipotle Mexican Grill, whose stock valuation was chopped by more than 18% after it cut its sales forecast on Wednesday (US time).
“[Consumers] feel the pinch and we feel the pullback as well,” Chipotle’s CEO Scott Boatwright told analysts after the results, adding the chain had lost diners to grocery stores, not other restaurants.
Boatwright went on to blame unemployment, increased student loan repayments, and slow wage growth on top of inflation, as factors weighing on consumers’ spending.
The fact that the US Federal Reserve is “flying blind”, to a degree, without official employment data while the government is shut down only adds to the uniqueness of the situation, said Jasper.
“It’s just getting a little bit weird out there in some ways,” he said. “Yeah, I get sick of talking about AI as well, but all these deals that Nvidia is doing to fund everyone to buy their chips just feels very strange to me, but I've had that feeling for a while.”
He is cautious about using the term ‘bubble’, because it lacks nuance
“Common sense, to me, says that this is real technology; it will change the world, there will be massive productivity gains, there will be companies that are successful as a result of that.
“Now that doesn't mean that there are not some horrifically over-valued value stocks, whether they be public or private, in this space but there, similarly, will be other companies that are making real gains from that.”
Google’s traditional search revenues, for instance, have been seen as a victim of AI-enabled searching but, actually, the company is serving AI to consumers more efficiently than other companies.
Meta, on the other hand, was starting to see costs rise faster than revenues in the AI area, Jasper said, and its return on investment there is becoming more “murky”.
ASB CIO Frank Jasper.
Rate cut
Meanwhile, the Fed’s Open Market Committee’s decision to cut rates again mid-week – to between 3.75% and 4% – was largely expected, but chair Jerome Powell’s accompanying comments “hosed down” any suggestion of another cut in December, noted Jasper.
“That real uncertainty around payrolls, that's the big thing that would cause them to keep cutting rates.
“Because we know inflation's a bit sticky. It's not at 2%, it's more like 3% – it's still going to bounce around a bit there, in our view. But if payrolls keep being weak, then they'll just feel like they need to keep cutting, and so you're left with second-tier data releases to support that position going forward.”
Investors have been seeking safety in gold of late, but prices have continued to settle back down after reaching a high of US$7650 earlier this month – they are still up nearly 50% over the year to date.
Jasper said ASB had recently pared back its portfolios’ positions in the commodity – it was 3% three years ago, and 2% until recently, when it was cut to 1%. That’s because the commodity had ceased behaving according to its fundamental defensive nature and more like a growth asset.
“The real rationale for owning gold is that it's a really quite defensive asset when there's risk going on in the world and when there's been inflation pressure as well, so it's a really good diversifier…
“If your rationale for gold is that it's going to be a somewhat defensive asset that's going to hedge my geopolitical risk, is going to act as a negative beta play on my growth assets … if, all of a sudden, it starts to behave like a growth asset, now I'm not getting my defensive play there, I just have another version of Nvidia shares.
“So we don't want to keep loading the portfolio out with things that look the same.”
