The Magnificent Seven stocks, a group of tech giants that have driven market gains for much of the past year, just experienced their worst trading day on record. This dramatic downturn was fueled by disappointing earnings reports from Tesla and Alphabet, raising concerns about the sustainability of their rapid growth and the high costs associated with artificial intelligence (AI) investments.
The Roundhill Magnificent Seven ETF, which tracks these tech behemoths, saw its largest intraday decline since its inception in April 2023, plummeting 5.8% on Wednesday. Investors were spooked by earnings reports from Tesla and Alphabet, which highlighted significant challenges ahead.
Tesla, a key player in the electric vehicle market, reported a staggering 45% decline in profits for the quarter. This drop was attributed to rising AI development costs and a decrease in average vehicle sales prices. The company's shares fell more than 10% as Wall Street digested these disappointing results and the delayed rollout of Tesla's robotaxi.
Alphabet, the parent company of Google, also faced investor backlash despite beating earnings estimates for the quarter. The company reported spending $13.2 billion on property and equipment, nearly double the amount from the same period last year. CFO Ruth Porat warned that capital expenditures would remain high for the rest of the year, leading to a 5% drop in Alphabet's stock.
Impact on Major Indexes
The selloff in the Magnificent Seven stocks had a profound impact on major indexes. The S&P 500 fell by 2.3%, its largest percentage loss since December 2022, while the tech-heavy Nasdaq dropped 3.6%, marking its worst day since October 2022. The Dow Jones Industrial Average, which does not weigh stocks by market capitalization, suffered a milder 1.3% loss.
Broader Market Implications
The Magnificent Seven stocks, which include Microsoft, Meta, Apple, Amazon, and Nvidia in addition to Tesla and Alphabet, have been pivotal in driving market gains. However, their recent performance has raised questions about the sustainability of their growth. The group's earnings are expected to grow 30% in the second quarter, significantly outpacing the 10% growth forecast for the entire S&P 500. Despite this, it would mark the second consecutive quarter of slowing growth for these tech giants.
Investors have also been rotating into smaller companies that are expected to benefit from anticipated Federal Reserve rate cuts. This shift has further pressured the Magnificent Seven stocks, which had already started to fall out of favor even before the recent selloff.
Future Outlook
Looking ahead, the remaining members of the Magnificent Seven are set to report their earnings soon. Microsoft, Meta, Apple, and Amazon are all scheduled to release their results next week, while Nvidia will report in late August. These reports will be closely watched for further indications of the tech sector's health and the potential impact of AI investments.
Despite the recent downturn, all but one of the Magnificent Seven stocks remain in positive territory for the year, with Tesla being the outlier. However, the recent selloff serves as a stark reminder of the volatility and risks associated with high-growth tech stocks.
