Why have the big seven tech companies been hit by AI boom doubts?

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Their shares have fallen 11.8% from last month’s peak but more AI breakthroughs may reassure investors

It has been tough week for the magnificent seven, the group of technology stocks that has played a dominant role in the US stock market, buoyed by investor excitement about breakthroughs in artificial intelligence., Amazon, Apple, the chipmaker Nvidia, Google’s parent, Alphabet, Facebook’s owner, Meta, and Elon Musk’s Tesla accounted for half the gains in the S&P 500 share index.

Other factors at play include investor expectation that the US central bank, the Federal Reserve, may lower interest rates as soon as next month. The prospect of a drop in the cost of borrowing has buoyed investor support for companies that might benefit, such as smaller businesses, banks and real estate firms. This is an example of “sector rotation”, where investors move their money into different areas of the stock market.

Quarterly results this week have been a mixed bag. Microsoft’s cloud computing division, which plays a key role in helping companies to train and operate AI models, reported lower-than-expected growth. Amazon, another big cloud computing player, also disappointed as growth at its cloud business was offset by higher spending on AI-related infrastructure such as datacentres and chips.

A general sense that tech valuations may have become too high has also played a role. Angelo Zino, a technology analyst at CFRA Research, says: “Valuations were getting to 20-year highs and we were due for a pullback, as well as a pause to digest some of the gains we have seen over the past 18 months.”

 

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