"Mag Seven" Plunge as AI Bubble Bursts Early

Value_investing
07-25

Wednesday saw the "AI trade" hit a rough patch, with the "Magnificent Seven" suffering their biggest one-day drop since October 2022.

图片图片

According to $DJIA(.DJI)$ market data, the market-cap-weighted index of these seven companies plummeted 4.1%, marking a cumulative decline of 9.8% since their recent peak on July 10. Over the same period, the Roundhill Magnificent Seven ETF tanked more than 11%, entering correction territory for the first time since last October.

MV vanished by over $1.7 trillion

Since the July inflation report fell short of expectations, markets have grown more optimistic about multiple Fed rate cuts by the end of 2024, with the first cut anticipated in September. Since then, the combined market value of the "Magnificent Seven" has vanished by over $1.7 trillion.

As anticipation of a September rate cut rose, small-cap and value stocks, which had lagged behind the $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ for much of 2024, surged rapidly.

However, the selling pressure mainly centered on the tech sector, which has steadily increased its weight in the market-cap-weighted S&P 500 over the past year. Before Wednesday's close, the index's information technology sector dipped nearly 4%.

TSLA & GOOG earnings

$Tesla Motors(TSLA)$ and $Alphabet(GOOG)$ $Alphabet(GOOGL)$ 's latest earnings reports fueled the selling spree. Tesla reported a 40% drop in quarterly profits, sending its shares down over 12%—the steepest fall since January. Alphabet, despite beating profit and sales growth expectations, missed analysts' marks for YouTube ad revenue.

图片图片

Perhaps the most concerning detail in both reports was Alphabet's aggressive AI investments, which may take longer to yield results. The company's shares dipped nearly 5% in recent trading.

"The potential return on their investments could take longer, and that's key for me," said Kim Caughey Forrest, Founder and CIO of Bokeh Capital Partners. The past two weeks' sell-off in "Magnificent Seven" stocks caught investors off guard, but signs were already there.

Small-cap + Value stocks

Investors have been unloading corporate bonds issued by "Magnificent Seven" over the past two weeks, according to BondCliQ data, though these sales barely impacted yields.

As tech stocks tanked, the small-cap $iShares Russell 2000 ETF(IWM)$ and the value-oriented $DJIA(.DJI)$ also dipped, but losses were relatively modest, having performed strongly since early June.

Other sectors remained resilient, with utilities and healthcare shining particularly bright. Meanwhile, around 217 S&P 500 components still ended the day in the green.

Yet, the strength of these stocks wasn't enough to prevent the S&P 500 from posting its first 2% drop in 356 days, closing 2.31% lower at 5,427 points—its worst performance since December 2022.

The tech-heavy Nasdaq Composite fared even worse, dropping 3.64% to 17,342 points, marking its worst performance since October 2022.

Good Ways to Endure a Market Downturn?
What do you think is the best way to endure a market downturn?
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

  • Barcode
    07-26
    Barcode
    Wow, big drop for the "Magnificent Seven"! Tesla's earnings miss and Alphabet's AI spending really shook things up. Do you think tech will bounce back soon, or is it time to focus on small-cap and value stocks?Cheers, BC 🍀
  • Marialina
    07-26
    Marialina
    AI bubble burst, causing the "Mag Seven" to plunge.
  • glitzii
    07-26
    glitzii
    Wow, what a plunge for the "Mag Seven"
Leave a comment
3
3