The momentum surrounding artificial intelligence (AI) is steadily beginning to wane following recent disappointing earnings seasons that involved several of the biggest U.S. technology companies.
Though the reported results weren’t the worst we’ve seen, in fact, some companies reported better-than-expected results, the overall performance on the stock market was relatively muted, despite some big-tech names delivering improved results.
After starting 2024 at a sluggish pace, investors are beginning to wonder whether the hype surrounding artificial intelligence and those companies fueling the development will continue to hold their momentum in the coming months and heading into 2025.
Concerns regarding the health of the U.S. economy have started to show cracks in the market. Investors are losing patience with the Federal Reserve.
Following a disappointing July jobs report, many analysts are now convinced that the central bank will begin cutting interest rates by September. And by the looks of historical CD rates, the next rate cut could bring much-needed relief to the market and consumers.
However, while the Federal Reserve has called for a “higher for longer” approach, some argue that policymakers have kept interest rates “too high for too long.” With things warming up, and uncertainty becoming more apparent, investors who were hoping to hold onto technology stocks as a possible last resort might start changing their tune in the coming months.
A Few Bad Apples Among The Bunch
Wall Street, or at least U.S. markets becoming heavily concentrated around technology stocks, and more specifically a handful of mega-cap companies often better known as the Magnificent Seven.
This is nothing new, and anybody, whether they’re a veteran trader or novice investor, is very well aware of the Magnificent Seven and the seemingly, “magnificent” influence they currently have on stock market conditions.
In the last five years, the Magnificent Seven has continued to outperform other stocks, and more impressively, the broader S&P 500.
Those companies, which include the parent company of Google, Alphabet, Amazon, iPhone maker Apple, Meta Platforms, Microsoft, the Wall Street darling NVIDIA, and Tesla collectively delivered robust returns of 75.71% in 2023.
The S&P 500 returned 24.23% in the same time.
At the beginning of this year, most of the companies had already seen strong gains within the first 30 days of trading. Microsoft was up approximately 10%, Amazon gained 14%, Alphabet had advanced a modest 3% and NVIDIA improved by nearly 37%.
And while some may have started better than others Tesla has been considered the biggest underperformer of them all. The electric automaker witnessed share prices tumble a strong 24% in January, and on a year-to-date basis, shares are down approximately 21%, through August 12.
The steep decline in share performance came on the news that the company had seen earnings falling faster than many investors expected. Between Q4 2022 and Q4 2023, earnings fell more than 40% to roughly $0.71 per share.
Tesla was once at the top of the electric vehicle (EV) industry, a market that it once dominated, but a decline in sales, coupled with an increase in new competition entering the market meant that Tesla had fallen from its top position.
New competitors didn’t only bring plenty of new options to choose from, but Chinese automakers can also deliver cars for cheaper. The China-based EV automaker NIO has quickly surpassed Tesla as the fastest-selling EV brand in the world.
The NIO L60 SUV is a direct competitor to Tesla’s Model Y, with prices starting at $30,465 compared to the Model Y which starts at over $43,000. Though most Chinese-made cars are not yet available in the U.S. and perhaps for the foreseeable future due to political tension between the two countries, Tesla has started to lose out in key markets around the world, including parts of Europe and Asia.
Then there’s the case with Apple. Though the company is known to be resilient in the face of wider uncertainty, the iPhone maker has fallen behind in the race for innovation, and this has meant that investors have started losing optimism in the long-term outlook for the company.
Same as with Tesla, the tech giant started the year on the low end, with stocks advancing a meager 0.11% in the first 30 days of the year. Not only this, but the company kept much of its AI news quiet until halfway through the year when company CEO Tim Cook announced Apple Intelligence at Apple’s Worldwide Developers Conference in June.
Apple Intelligence will act as the company’s native AI system, which will be compatible with iOS 18 and newer. Though Apple eventually managed to catch up to the rest of its peers, investors haven’t been convinced enough about the company’s strategy.
Though the news of Apple Intelligence had helped bolster share performance, with AAPL advancing nearly 11% in the days following the announcement of the company’s native AI system, this was still not enough to keep the momentum going.
For starters, Berkshire Hathaway, a long-time supporter and investor in Apple has drastically changed its tune in recent months, having reduced its stake in Apple from 905 million shares in December 2023 to 400 million shares by June 2024, representing a 55% decline.
Berkshire dropping such a big stake in Apple might’ve not been on the cards for this year, seeing as Buffett has been a long-standing supporter of the company for decades.
However, things are changing. Apple has struggled to gain dominance in key consumer markets, especially in China. In Q1 2024, the tech giant reported a 9% decline in device sales in China, while Apple’s net operating income fell by 10% during the same period.
Consumers are beginning to look for more affordable alternatives to Apple, and in a highly competitive marketplace such as China, other smartphone makers such as Xiaomi and Huawei have fared better in the short term.
The stretched valuations and the prospects of falling behind in the race for innovation could’ve been enough to convince Buffett to reduce Hathaway’s stake in the company.
Slow Momentum Catches Up To The Market
The Magnificent Seven’s play on artificial intelligence is losing steam on the stock market. Investors are seeking to park their cash in less volatile vehicles that can ride out potential market downturns.
The companies that had once spearheaded the development of this technology are now facing the music in more ways than imagined.
For instance, take Alphabet, the company that has invested billions into several high-profile AI projects throughout much of 2023 and 2024. At the beginning of the year, the company announced an AI-powered image search functionality that would assist users with searching for specific items through the use of photography.
However, in less than 24 hours, the company removed the service from the market, citing that certain challenges with the artificial software had caused the service to work improperly.
Elsewhere, Apple is having a hard time circumventing AI regulations imposed by the Cyberspace Administration of China, a government internet watchdog that has introduced a handful of AI regulations that seek to curb international companies from deploying generative AI services without first obtaining permission from the government.
Though China is the first company to regulate the use of generative AI, it has in return brought multiple problems for U.S. tech companies looking to deploy native artificial intelligence software in China. Apple has said that they are in talks of finding a Chinese developer to help develop their Apple Intelligence software.
The Magnificent Seven has been quick to announce the delivery of AI services in recent years, however, investors are starting to wonder if all that talk has started to catch up with tech giants.
Though it’s hard to estimate whether we will see the Magnificent Seven taking top priority among investors anytime soon, especially after the recent market meltdown, investors might begin looking to divest their position and allow themselves more legroom to remain flexible in a market that continues to be dominated by a handful of names.
