The largest tech firms in the US experienced huge challenges from Chinese AI, DeepSeek. Although AI start-ups triggered shock waves due to their low cost and efficiency, the biggest tech companies stepped up and delivered per their expectations. This is implied by their market capitalization in leading the S&P 500 to new highs.
Apple Inc. and Meta Platforms Inc. were among the companies that reported results this week, helping boost the S&P 500.
The so-called “Magnificent Seven” – Microsoft Corp., Amazon.com Inc., Alphabet Inc., and Tesla Inc. – dropped mostly, but among the “Big Board” names, they had strong ownership from shareholders.
Tech giants defy expectations with strong earnings
The Magnificent Seven has been the main engine of the S&P 500’s advance over the past two years, even though profit growth has slowed down and the stocks are expensive. Thus, investors have turned their attention to the other 493 companies in the index and expect them to outperform. So far, through earnings season, both for the tech giants and the broader market, earnings have been mostly positive.
According to Adam Sarhan, the CEO of 50 Park Investments, optimism on earnings “has been through the roof, and so has the market. For the most part, things are higher. Fundamentals remain intact.”
The tech sector’s performance remains strong, with profit growth for the Big Tech cohort expected to come in at 26% for Q4, above the 22% forecast at the start of the week.
However, this means that the growth rate has decelerated for the fourth straight quarter and is still substantially higher than the 10% estimate for the broader S&P 500.
Meta CEO Mark Zuckerberg reassured investors about his company’s AI strategy and even discussed how not to spend money on AI infrastructure. This optimism was seen in Meta’s stock, which rose 6.4% this week, extending its consecutive daily gain to 10, its longest in nearly a decade.
But it wasn’t all good news. Microsoft shares fell 6.5% after its cloud computing business grew slower than expected. The company is having issues scaling up its AI infrastructure to meet the demand. However, Meta and Microsoft executives have announced that they will continue investing in AI in the future.
DeepSeek challenge and slowing growth pressure AI infrastructure stocks
Meanwhile, a challenge from DeepSeek and some disappointing earnings reports from AI infrastructure stocks caused a slight setback in the sector. Shares of Nvidia Corp., a key player in the AI infrastructure market, fell 16%, erasing more than $500 billion in market cap. Other chip makers like Broadcom Inc. and Micron Technology Inc. also declined.
Sarhan noted that he has sold some of the AI infrastructure stocks because of the increasing risk that DeepSeek poses. He noted that it’s all speculation right now, but if major companies stop needing every high-end chip they can get their hands on.
To Dave Mazza, chief executive officer at Roundhill Investments, DeepSeek’s emergence, coupled with slowing earnings growth, has put more pressure on the tech giants to show returns on AI investments in the months ahead. That’s especially so, given their lofty valuations.
The Magnificent Seven’s price-to-earners ratio is now 31, much higher than the 20 at the end of 2022 and significantly higher than the S&P 500’s 22 times.
