Tech Giants Losing Ground: How Smaller Companies Are Closing the Gap
The stock market has seen a shift in leadership as Big Tech companies like Nvidia Corp. and Microsoft Corp. have seen a slump in their stock prices. Since the S&P 500 peaked on July 16, the so-called Magnificent Seven tech stocks have mostly slumped, with the Bloomberg Magnificent 7 index falling 5.3 percent. This decline has led to a rotation in the market, with investors turning to sectors like real estate, utilities, and consumer staples.
The shift away from tech giants is attributed to concerns about sputtering economic growth and the United States Federal Reserve’s plans to cut interest rates. While tech companies have been driving gains in the equities benchmark for the past two years, the recent slump has prompted investors to look for opportunities in other sectors.
One of the main factors contributing to this rotation is the expectation of monetary policy easing. Investors are also attracted to the improving outlook for profits in sectors outside of tech. For example, health-care companies saw their earnings rise by 16 percent in the second quarter, after seven consecutive quarters of shrinking profits. This trend is expected to continue, with profit growth projected to hit 45 percent in the first quarter of 2025.
Despite the strong earnings from tech giants, their profit growth has slowed down compared to previous years. This slowdown is partly due to heavy spending on AI computing gear, which has raised concerns about profit margins. Companies like Amazon, Google-parent Alphabet, Microsoft, and Meta Platforms have poured billions into capital expenditures, leading to questions about the financial justification for these investments.
While tech stocks have seen a downturn in recent months, their valuations remain elevated. For example, Microsoft is priced at 32 times profits projected over the next 12 months, well above the average of 25 over the past decade. This has led some investors to look for cheaper alternatives in other areas of the market.
Despite the shift away from tech giants, experts believe that technology will continue to perform well in the market. Companies like Nvidia, which specialize in AI-related technologies, are expected to see continued growth. However, investors are also looking for value in other sectors, leading to a diversification of investment strategies.
In conclusion, the recent slump in Big Tech stocks has led to a rotation in the market, with investors turning to sectors outside of tech for opportunities. While tech companies continue to perform well, the shift in leadership indicates a broader trend towards diversification in the market. As the economy evolves and monetary policy changes, it will be interesting to see how these trends continue to play out in the coming months.