3 Reasons Why Once-Popular Tech Stocks Have Suddenly Gone Unpopular

A sell-off in technology stocks on Wednesday pushed the Nasdaq and S&P 500 to their worst performances of 2022. The decline in the high-tech sector followed a year-long rally by the “Magnificent Seven,” a group of seven industry giants that have driven markets to record highs.

The slide continued Thursday, with the tech-heavy Nasdaq composite index down 0.5% in morning trading. Chipmaker Nvidia shed 1.4% and Google owner Alphabet fell 1.2%, while four other members of the group — Amazon, Apple, Meta Platforms and Microsoft — also lost ground. The only member of the group to gain Thursday morning was Tesla, up about 3%.

The Magnificent Seven (sometimes called the “Mag Seven”) powered two-thirds of the S&P 500’s gains last year, with investors betting that the companies would benefit from their AI investments. But investors are increasingly asking whether the billions of capital poured into the emerging technology will pay off anytime soon.

“The Magnificent Seven stocks are now looking like the Delayed Seven,” Piper Sandler analysts noted in a research note.

Here are three issues affecting technology stocks.

Questions about AI profitability

For one thing, investors are increasingly concerned about whether tech giants’ massive investments in AI will boost their profits. Companies, as well as utilities and governments, are expected to spend more than $1 trillion combined on AI over the next few years, according to Wedbush analyst Dan Ives.

“(P)eople are starting to ask more questions about the economics of AI (what is the return on investment for all this investment?),” analysts at Vital Knowledge wrote in a statement on Thursday.

Those questions weighed on investors as Tesla and Alphabet reported earnings this week. While their quarterly earnings weren’t a disaster, they raised questions among investors about which other financial results from the market giants might fall short of expectations, said Sam Stovall, chief investment strategist at CFRA.

“How much disappointment can we expect? Maybe we should sell first and ask questions later,” he said.

Great expectations can be hard to meet

Earnings expectations are high for U.S. companies, but especially for the Magnificent Seven. Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla must continue to deliver strong growth after being responsible for most of the S&P 500’s record highs this year.

Tesla was one of the stock market’s biggest drags on Wednesday, falling 12.3% after it reported a 45% profit drop in the spring and its earnings fell short of analysts’ forecasts.

“With a large overachievement comes high expectations, and the bar was set extremely high for this group – so a report that may look like a ‘beat and beat’ on paper may actually be disappointing” for some stocks like Alphabet, which owns Google, Vital Knowledge said.

Investor Attitude Changes to Smaller Stocks

Finally, investors are shifting money in a strategy called “sector rotation,” according to John Lynch, chief investment officer at Comerica Wealth Management. This strategy involves investing assets based on changes in the economic cycle, with investors switching between different stocks based on trends such as inflation and earnings growth.

“Equity market leadership has shifted dramatically in recent weeks,” Lynch wrote in a recent report, noting that small-cap stocks have enjoyed a “significant” rally this month.

The latest inflation report, which showed that the U.S. prices are falling faster than expectedhas encouraged some investors to move money into smaller stocks on expectations that the Federal Reserve might soon cut interest rates. That could benefit those companies disproportionately because they are more dependent on borrowing than larger companies, Lynch noted.

—Based on reports from the Associated Press.