Enormous Seven Lose $1 Trillion: Is The AI Surge Over?
The past week has seen a major slump in tech stocks, even though several leading companies in the industry reported strong earnings. This has made investors wonder if the rapid expansion of artificial intelligence has reached its peak.
Tech-linked stocks have been falling consistently and by Friday afternoon, a key technology index was down by nearly 5% for the week. This is its lowest level since April, indicating a wave of risk-aversion gripping the financial district.
A prominent Semiconductor ETF fell by more than 7%, while a renowned Innovation ETF saw a decline of more than 10%, highlighting the extent of the tech downturn.
The Great Seven Couldn't Avoid The Sell-Off
Even the so-called ‘Great Seven’ could not evade the sell-off. Their losses, however, were relatively lesser. A particular ETF representing these seven companies dipped 3.8% over the week, marking its steepest decline since early April but still less than the overall sector's 5% drop.
Just last week, investors were lauding a well-known corporation for exceeding a $5 trillion market capitalization, which pushed up the combined market value of the Great Seven beyond $22 trillion.
Fast forward to Friday, and the total has shrunk to $21 trillion, wiping off more than $1 trillion in market value. One company alone suffered a loss of over $500 billion, with its shares down 8% for the week.
Did A Veteran Strategist Ignite The AI Sell-Off?
It was noted by a seasoned strategist that the tech slump began on Tuesday, following reports that a famed investor had taken bearish positions against a couple of leading tech companies.
Interestingly, this news came out just as one of the companies reported outstanding quarterly results, far exceeding expectations.
The strategist observed that while the investor's move sparked panic in the market, it seemed more like a tactical short on specific high-flyers rather than a prediction of a full-blown AI bubble.
He highlighted that the current dominance of technology is backed by real earnings strength: "The technology and communication services sectors of the S&P 500 together now make up 45% of market cap and 38% of earnings. There's more earnings support for today's tech valuations than there was in the late 1990s. The bubble may deflate occasionally, but it's unlikely to burst."
A head of Macro Research supported this view, suggesting that higher valuations mirror a structural change in corporate profitability. "If AI continues to widen margins structurally, today's multiples aren't a bubble — they reflect permanently higher earnings power," he stated.
Not Everyone Is Hopeful
However, not all share this optimism. A chief investment officer cautioned that markets are caught in an AI-fueled craze. He termed the current environment as "a mega-cap growth bubble," driven by a capital expenditure arms race and stock prices far exceeding actual AI-driven revenues and earnings.
Another fund manager saw signs of late-cycle euphoria. He remarked that U.S. equities now account for about 72% of the global equity benchmark, and that the Magnificent Seven collectively trade at 58 times free cash flow— or about 77 times when adjusted for stock-based compensation.
According to him, these companies have a combined market cap of $22 trillion and generate about $385 billion in annual free cash flow, far below their reported net income of $568 billion.
He warned that history shows that paying such stretched multiples seldom yields strong long-term returns. "Nobody knows what the catalyst will be that bursts this bubble. But when valuations stretch this far, time itself becomes the biggest risk," he concluded.