Why American tech stocks are newly vulnerable

Business Times

24-04-2025

AS THE panic fades, investors' nerves are still jangling. For the time being, stock markets have stopped convulsing and the prices of American Treasury bonds are no longer in free fall. Yet share indices across America, Asia and Europe have hardly recovered their poise; instead, day-to-day drops of a percentage point or more have become unremarkable.
The VIX index – Wall Street's 'fear gauge', which measures expected volatility using the market price of insurance against it – has fallen from its nerve-shredding peak reached a fortnight ago. It is nevertheless at a level last seen in 2022, amid a grinding bear market. The price of gold has been breaking record after record. Investors, in other words, are offloading risk wherever they can and preparing for a drawn-out slump.
For one group of stocks, that is an especially big problem. 'You can only sell what you own,' says Michael Hartnett of Bank of America, 'and by the end of last year, fund managers in aggregate had a record-breaking 'overweight' position in US equities.'
In particular, they had bet on a clutch of tech giants that Hartnett, two years ago, dubbed the Magnificent Seven: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. Between March 2023 and March 2025 'long Magnificent Seven' continuously topped his bank's monthly survey asking fund managers to name the most crowded trade. 'It was an accident waiting to happen,' says Hartnett.
Now the accident is under way. Since a peak in December, an equal-weighted average of the Magnificent Seven's share prices has fallen by 27 per cent, far more than the broader S&P 500 index or indeed that for any other big stock market.
Tesla has fared worst, with its market value cut in half. Analysts at Goldman Sachs, a bank, have called the group the 'Maleficent Seven'. It is quite a turnaround for companies that, a few months ago, were the standard-bearers for transformative technology, not least artificial intelligence (AI), and the explosive profits it might mint. What is more, their share prices matter greatly even to passive index trackers, since they still account for more than a quarter of the S&P 500's market value. Is the market turbulence killing the hottest theme in investment?
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With investors having previously bet so heavily on the tech giants, any reversal in sentiment might easily have led to big losses. Recent weeks have been especially tough, however. Erratic policymaking in the White House has prompted investors to question the wisdom of outsize allocations to American assets.
A trade war, meanwhile, has sparked worries of a slowdown that hurts America more than others. Such fears might lead you to sell shares in the Magnificent Seven, since they formerly embodied the widespread belief in American exceptionalism and rely on demand from consumers the world over.
Moreover, a trade war will cause grave harm to the business models of multinationals whose vast supply chains, and customer base, span continents. That is true not just of the Magnificent Seven but, for instance, of chipmakers around the world. Sure enough, the Philadelphia semiconductor index, which tracks companies in the industry, has fallen by more than a third since a peak in July.
The most recent drop in Nvidia's share price, beginning on Apr 15, came after the company said that America's government had barred it from selling its 'H20' chip to China without an export licence. The chip was released last year and explicitly designed to avoid export controls; Nvidia warned the new restrictions will wipe US$5.5 billion from its quarterly earnings.
A bite out of Apple
Even after the recent plunge in their share prices, most of the Magnificent Seven remain unusually vulnerable to additional shocks. Three of them – Amazon, Apple and Microsoft – have market values that are around 30 times their underlying earnings; Nvidia's equivalent ratio is 34; Tesla's is 118. These compare with an average 'valuation multiple' of 22 for the broader S&P 500 index today, and a long-run historical one of around 19.
High valuations are justified for companies, such as America's tech giants, that expect to sustain high rates of profit growth for a long time to come. The lion's share of their value comes not from their present cash flows, but from the much larger earnings they expect to make in the future. Yet all corporate profits many years from now are subject to radical uncertainty, and those for firms reliant on technological innovation are even more so. Who knows what the world will look like in 2030 or 2040? Since the share prices of firms with high valuations depend far more on this future, they are more sensitive to shocks.
Meanwhile, the Magnificent Seven's barnstorming profit growth is unlikely to continue for ever. Over the five years to the end of 2024, the group's aggregate earnings before tax, debt interest and accounting write-downs grew at an annualised rate of 41 per cent. Analysts' average forecast for 2025 is still for an extremely healthy 34 per cent. But over the past seven quarters 'the second derivative of earnings has been negative', notes Torsten Slok of Apollo, a private-asset manager, meaning that the rate of earnings growth has fallen. That might be a sign of a slowing economy or – more ominously for companies with market values predicated on ballooning profits – that their trajectories are levelling out.
The tech giants also have more to fear from a recession than they did in the past. Investors once lauded their 'capital light' business models, under which they needed to plough only a small proportion of their cash into physical assets and spend little to acquire new customers. This, in turn, helped justify high valuations, since it left tech firms with low fixed costs and hence better able to weather falling demand when recessions materialised.
Those days are now history, with the big tech firms splurging on everything from developing new platforms to investing in the physical infrastructure needed for AI. The trend is accelerating. Whereas in 2019 the Magnificent Seven spent 35 per cent of their cash from operations on capital expenditure, in 2025 analysts expect it to be 49 per cent. The hope is that such investment will fuel innovation, better products and even greater profits – and in a boom it may well do. Yet it also leaves the tech giants far more exposed to faltering demand than they were before.
The Magnificent Seven are gobbling up capital in another way, too, points out James White of Elm Wealth, an investment firm. Whereas they themselves are profitable, many of their customers – whether for Nvidia's chips or Amazon's Web services – are smaller, loss-making startups much further down the AI food chain.
Part of the tech giants' explosive profit growth has therefore come from the floods of cash venture-capital firms and other financial institutions have poured into such startups in recent years. For that to continue, capital must remain plentiful and relatively cheap. Neither is likely if investors continue to worry about the future and prefer buying insurance to taking risk. Even if they prove to be ephemeral, market ructions could yet dole out much more damage to America's corporate titans.
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