It’s a cruel summer for Big Tech stocks

The Magnificent Seven group of tech titans has shed $1.52 trillion in market value in the past three weeks, the biggest drop over such a stretch on record. That reflects an 8.1% slide in Tesla shares and a 6% decline for Alphabet last week, after their earnings reports sparked a huge stock-market selloff and doubts about the artificial-intelligence frenzy that has powered stocks to new heights.

Already, traders had been skittish about their bets on big tech.

“It’s still a little bit of a messaging of ‘taking it on faith,’" said Yung-Yu Ma, chief investment officer at BMO Wealth Management. “And right now, the market doesn’t seem especially inclined to take it on faith, given how much has been priced in."

Tech shares have been stumbling since earlier this month, when a cool inflation report boosted traders’ confidence that the Federal Reserve will cut interest rates in September. That prompted investors to trim their wagers on this year’s market leaders and rush into shares of smaller companies that are likely to benefit more from lower borrowing costs.

The S&P 500’s information-technology sector, home to Apple and Nvidia, has declined 9.2% since the inflation report. The communication-services sector, which includes Meta Platforms and Alphabet, has tumbled 9.6%. The small-caps heavy Russell 2000, meanwhile, has gained 10%, while the S&P 500 has edged down 3.1%.

Tech stocks will face their next test in the coming days, when other members of the Magnificent Seven report earnings. Microsoft is scheduled to report Tuesday afternoon, followed the next day by Meta. Amazon.com and Apple will be in focus Thursday. Chip maker Nvidia, the biggest driver of the S&P 500’s gains this year, is scheduled to report later in August.

So far, investors have been underwhelmed by the first batch of tech results.

Alphabet said sales growth slowed in the second quarter, as the parent company of Google and YouTube kept pouring billions of dollars into building out generative-AI capabilities. Its shares fell 5% the next day. Tesla’s profitability took a big hit from lower revenue, with buyers paying less for its core models. Its stock dropped 12% in the following session.

Netflix, which isn’t a member of the Magnificent Seven, reported on July 18 that it continued to add new customers. But it said it doesn’t expect advertising to be a primary driver of future revenue growth and warned that subscriber growth in the third quarter will be slower than last year. Its shares slipped 1.5% the following day.

Not all tech companies have disappointed investors. Shares of International Business Machines rallied 4.3% Thursday, their best day since late January, after the book of business for its Watsonx generative-AI platform topped $2 billion, up from more than $1 billion in the first quarter.

Given their sky-high valuations, however, some analysts worry it will get harder for tech companies to impress investors in the year’s second half. Plus, there are already signs that earnings growth is broadening out, which some investors see as a positive development.

“The Magnificent Seven is no longer the only game in town where earnings growth can occur," said Jeffrey Schulze, head of economic and market strategy at ClearBridge Investments.

Earnings among the companies in the S&P 500 are expected to rise 9.8% this quarter from a year ago, data from FactSet show. Without the Magnificent Seven, profits for the other companies in the index are expected to climb 5.9%, according to John Butters, senior earnings analyst at FactSet.

Despite the recent selloff, tech stocks still look pricey. Tesla trades at 78.3 times its projected earnings over the next 12 months, according to FactSet, while Nvidia trades at 35.5 times. The S&P 500 trades at 20.7 times.

Those high valuations could make smaller companies increasingly appealing.

“Mega-caps are a little more expensive than the rest of the universe," said Ivana Delevska, founder and chief investment officer of Spear Invest. “They really drove the first move up, and they’re going to have a hard time keeping up with the smaller caps for the second half of the year."

Write to Hardika Singh at hardika.singh@wsj.com