(Bloomberg) — After a week filled with earnings reports from big technology companies, one thing is clear: As profits decline, investors are no longer impressed by promises of artificial intelligence. They want to see results.
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With six companies within a group known as the Magnificent Seven having already released reports, year-over-year earnings growth slowed to nearly 30% in the second quarter, down from 50% in the previous period. Analysts expect this rate to slow further to around 17% for these companies in the third quarter.
Results from Microsoft Corp., Meta Platforms Inc., Amazon.com Inc. and Apple Inc. signaled this week that the world’s biggest companies are still investing heavily in artificial intelligence. However, shares of Microsoft and Amazon fell following their reports due to concerns that these AI investments are not paying off – at least not yet – echoing the drop in Alphabet Inc. shares.
“Investors are entering a ‘show me’ phase, looking for hard evidence of AI’s impact on revenue and productivity,” said Adam Sarhan, founder and CEO of 50 Park Investments. “This is causing some skepticism and volatility.”
Tesla Inc.’s July 24 report also disappointed investors, while Nvidia Corp.’s July 24 report also disappointed investors. should release the results later this month. This week’s latest impressions and comments have added to the existing volatility.
Investors were already shifting from big, reliable stocks to smaller, riskier parts of the market to lessen exposure to big tech. The earnings results, combined with signaling from the Federal Reserve that a September rate cut may be on the table and a weaker-than-expected employment report, sent the Nasdaq 100 index soaring.
On Friday, the high-tech index closed down 11% from its July peak, entering a correction. Investors fled AI stocks and bid up bonds, causing Treasury yields to fall.
The bond market “tells us we’re going to have to take this idiot down very quickly, and that worries everyone,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. “Lower interest rates work for stocks, except when it’s done in a hurry because things are bad.”
Amazon’s results, along with reports from consumer names like McDonald’s Corp. and Starbucks Corp., signaled a weakening U.S. consumer, raising concerns about a weaker macroeconomic outlook, she said.
Investors were already concerned about hype versus reality in the technology sector, which contributed to sharp reactions when large companies underperformed, said Burns McKinney, managing director and senior portfolio manager at NFJ Investment Group.
“Some of the earnings results released in recent weeks have reminded investors that there are a lot of really lofty expectations embedded in these valuations,” he added.
There were some bright spots in the week that signaled that AI trading is not completely dead.
Investors applauded Meta’s results, including comments from CEO Mark Zuckerberg that signaled that investments in AI helped boost targeted ad sales. Advanced Micro Devices Inc. spurred a rally Wednesday in chip stocks after releasing an upbeat revenue forecast.
“Essentially, what companies are saying is they have to do this, and if they don’t do it, they risk becoming irrelevant in the future,” Gene Munster, managing partner at Deepwater Asset Management, said of rising investment expenses. capital in artificial intelligence.
The strong market reaction doesn’t necessarily mean AI trading is over, Sarhan said.
“Instead, it suggests a recalibration of expectations,” he said. “We are seeing a shift from pure enthusiasm to a demand for tangible results.”
–With assistance from Esha Dey.
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