What’s behind Big Tech’s big sell-off?

All eyes have been glued to Big Tech in recent years with the sector acting as a powerful growth engine for US equity markets. A small group of companies in particular, dubbed the Magnificent Seven, has captured investor attention. This includes Nvidia, Microsoft, Apple, Amazon, Meta, Alphabet and Tesla. 

In many cases, their valuations have soared to dizzying heights. Chipmaker giant Nvidia has seen its share price rise by a whopping 2,500% over the past five years. However, after a bad month for the sector and a dismal few days for equity markets in general, some investors are starting to question whether Big Tech is losing its shine. 

After weak labour market data prompted fears of a recession in the US last week, markets have tumbled with the S&P 500 down more than 5% over the past five days. The Nasdaq is down 7% over the same period. What’s more, the Magnificent Seven tech stocks have been taking their fair share of the hit. In analysis shared yesterday, experts at AJ Bell revealed the Magnificent Seven’s combined market cap had shed $2.3 trillion since its July peak. 

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All eyes were already on the tech stocks after earnings season kicked off in July, as investors increasingly questioned whether their lofty valuations were sustainable. Six of the seven companies have now reported, with a lukewarm response from investors in some cases. 

Nvidia is set to close the season out on 28 August – and investors will be hoping for a big finale from the stock, which has been vying with Microsoft and Apple for top spot as the world’s most valuable company. But will they be disappointed? 

Nvidia has said that it expects its revenue for the quarter to come in at around $28 billion, plus or minus 2%. This would equate to a quarterly rise of 8% and an annual rise of 107%. However, amid fears that a tech bubble has emerged, investor expectations are high and any failure to meet or beat these forecasts could cause the stock to tumble. 

How have investors responded to Big Tech this earnings season? 

Investors have been exacting this earnings season, demanding increasingly strong results to justify lofty share price valuations. Where their expectations have been disappointed, many have voted with their feet and sold their stock. This meant several companies were in the red, even before the broader market sell-off began last week. 

Google’s parent company Alphabet was one of the first companies to report on 23 July, and its share price fell despite beating analyst expectations. Revenues rose by 15% on an annual basis, but investors reacted negatively to capital expenditure of more than $13 billion over the quarter – more than double the amount spent in the same period last year.

We saw something similar with Amazon when it released its results on 1 August. The company’s profits doubled compared to a year ago and its revenues rose by 10%, albeit coming in lower than analyst’s expectations. However, investors reacted negatively to news that the company had spent around $30.5 billion in capital expenditure in the first half of the year. 

What’s more, chief financial officer Brian Olsavsky told investors that spending in the second half is likely to be even higher. For context, the company spent $48.4 billion in 2023 as a whole. 

This suggests a trend could be starting to emerge – particularly given both companies said they were using the money to invest heavily in their AI capabilities. It seems investors are starting to demand greater evidence that these investments will yield returns. 

“AI has been such a driver of expectations and has led to an extraordinary surge in revenues for Nvidia as the hyperscalers like Google, Amazon and Microsoft’s cloud units race to build capacity,” says Steve Clayton, head of equity funds at Hargreaves Lansdown. “But at some point, that scale has to start delivering returns on capital and, so far, the jury is out,” he adds.

Bucking the trend, Meta (parent company of Facebook and Instagram) has been a bright spot this earnings season. Despite investing heavily in its AI capabilities and warning that capital expenditure for the year is likely to be higher than previously anticipated, the company’s share price rose after its results were delivered.

“What separates Meta from the crowd is that it can already prove AI is helping the business,” says Dan Coatsworth, investment analyst at AJ Bell. “For example, AI has helped its social media platforms to better predict the type of video content that keeps viewers engaged.”

“The more time people spend scrolling through social media posts on places like Instagram and Facebook, the more adverts they can be served and the more advertising income that goes into Meta’s pockets,” he adds. “That explains why advertising impressions jumped by a lot in the period. It also helped that the average price per advert went up.”

What about Apple and Tesla?

As far as Apple and Tesla are concerned, challenges in the Chinese market have been a big focus for investors. Both companies are facing fierce competition from home grown brands. 

When it comes to the iPhone, many Chinese consumers are opting for the likes of Huawei, Vivo, Xiaomi, Honor and OPPO. Meanwhile, e-vehicle manufacturer BYD is popular with Chinese consumers and briefly overtook Tesla in the final quarter of 2023, selling more battery electric vehicles than Elon Musk’s company managed globally. 

When it announced its results on 1 August, Apple revealed that sales in China had fallen compared to the same period a year ago. Despite this, chief executive Tim Cook was upbeat about the company’s long-term prospects in the region, adding that around half of the 6.5% sales decline was currency-related. 

The company is expected to launch the iPhone 16 and “Apple Intelligence” – a foray into the AI space – later this year. Investors will be watching closely to see how these perform. Josh Gilbert, market analyst at eToro, says that strong demand and sales in China will be “critical when the iPhone 16 is launched”. 

Meanwhile, Tesla has faced a tough backdrop in China over the past couple of years. This has been partly driven by anti-American sentiment and fierce competition, but a challenging consumer backdrop has also created problems. The Chinese economy has been having a tough time, and continues to suffer a property market crisis and weak spending.

There was some good news from the China Passenger Car Association last week, though. Sales of Teslas that were manufactured in China increased by 15% in July, compared to the same month a year ago. This comes after they fell by 24% in June, 6.6% in May, and 18% in April.

Investors were left disappointed when Tesla released its earnings last month, after profits plunged 45% year-on-year. The company also reported an increase in its operating expenses, largely driven by AI projects. Some are starting to lose patience, criticising the company’s fixation with ‘pie in the sky’ projects while its core business faces challenges.

“There is a lot of talk about robotaxis, humanoid robots and autonomous driving, which provides an exciting narrative for investors but doesn’t get over the fact that these are tomorrow’s potential riches, not today’s,” says Coatsworth.