Magnificent Seven stocks emerge from rocky week remarkably unshaken

NEW YORK – After a week for the biggest US technology companies that began with a body blow from a Chinese artificial intelligence (AI) upstart and included a batch of pivotal earnings, the biggest surprise may be how well they made it through.

Four of the biggest tech firms managed to mostly deliver on the promises implied by their gigantic market values, while at the same time assuaging anxieties brought by DeepSeek, whose impressively advanced, low-cost chatbot caught investors off guard and rattled markets this week.

Shares of Apple and Meta Platforms all ended the week higher, helping to push the S&P 500 Index to the cusp of another record, despite a walloping for Nvidia and other AI infrastructure stocks.

As a group, the so-called Magnificent Seven companies, which also include Microsoft, Amazon.com, Alphabet and Tesla, ended the week largely unscathed and still in the good graces of shareholders.

“Investors were probably pretty optimistic coming into the week, they got shaken up during the week, and then you had a few big voices coming in and saying everything is okay,” said Fulton Breakefield Broenniman director of research Michael Bailey.

“They’re not waving the white flag. These are supposed to be the smartest guys in the room and they’re not panicking.”

The Magnificent Seven has been responsible for the bulk of the S&P 500’s gains over the past two years.

With profit growth slowing and valuations stretched, investors have been increasingly looking to the other 493 companies for outperformance.

But so far this season, earnings from both groups have been generally positive.

“I’ve been really pleased with how strong earnings have been, and so has the market. For the most part, things are higher,” said 50 Park Investments chief executive Adam Sarhan. “Fundamentals remain intact.”

With Alphabet and Amazon to announce their results on Feb 4, profit growth for the Big Tech cohort in the fourth quarter is now expected to come in at 26 per cent, up from 22 per cent at the start of last week, according to data compiled by Bloomberg Intelligence.

While that is down from the 51 per cent increase seen in 2024’s first quarter and would mark a fourth straight quarter of slowing growth, it is still well above the 10 per cent increase anticipated for the S&P 500 Index.

Even more than the week’s actual results, it was comments on earnings calls that seemed to do most to win over investors in need of reassurance in the light of DeepSeek’s disruptive threat. 

Meta CEO Mark Zuckerberg expressed confidence in his company’s AI strategy and brushed aside concerns about overspending on AI infrastructure.

The performance overshadowed a disappointing revenue forecast and lifted the stock, which closed 6.4 per cent higher for the week. Its streak of 10 straight days of gains is the longest in almost a decade. 

It was not all good news. Microsoft slipped 6.5 per cent this week after growth in its cloud-computing division fell short of expectations as the company struggles to build out enough computing capacity to meet demand for its AI products.

And, while executives at Meta and Microsoft said they remain committed to massive outlays in the year ahead for their AI plans, many AI infrastructure stocks ended the week in the red.

Nvidia slumped 16 per cent, wiping out more than half a trillion dollars in market value. Other chipmakers including Broadcom and Micron Technology also fell. 

Mr Sarhan at 50 Park Investments said he sold some AI infrastructure stocks this week because of the uncertainty, even as some questions around DeepSeek’s technology and claims emerged. 

“It’s all speculation right now, but if major companies stop needing every high-end chip they can get their hands on, I don’t know that you’ll be able to estimate a bottom for AI chip names,” he said.

To Roundhill Investments CEO Dave Mazza, DeepSeek’s emergence coupled with slowing earnings growth has put more pressure on the tech giants to show returns on AI investments in the months ahead. That is especially so given their lofty valuations.

A Bloomberg index tracking the Magnificent Seven stocks is priced at 31 times profits projected over the next 12 months, up from about 20 at the end of 2022 and well above the S&P 500 at 22 times.

“It is fair to ask how much more multiples can increase, and harder to say you should keep allocating to names when multiples have increased so much without earnings accelerating,” Mr Mazza said.

For now, though, he acknowledged, “we are in a time of animal spirits and maybe euphoria, so maybe multiples can keep rising in the short term”. BLOOMBERG