Markets
Mint Primer The Magnificent Seven: Has the AI bubble burst?
Summary
- The immediate trigger was lacklustre earnings from electric carmaker Tesla and Google parent Alphabet, the first of the ‘Magnificent Seven’ megacaps to report quarterly numbers this earnings season.
A massive selloff in technology megacap stocks in the US has reverberated across the global financial markets, sparking fears of the artificial intelligence (AI) bubble bursting. Mint takes a look at the implications:
What’s happening on Wall Street?
The tech-heavy Nasdaq index nosedived 3.6% on July 24—its biggest single-day fall since October 2022, wiping off an astounding $1 trillion in investor wealth. The laggards included the top guns of the AI sector, such as Nvidia Corp, Broadcom and Arm Holdings. The broader S&P 500 index too could not escape the contagion, slumping 2.3% in its worst showing since December 2022. This was also the first time that the benchmark S&P 500 had closed more than 2% down in 356 sessions, its longest streak since 2007. Global equity markets, too, struggled against a sea of red on Thursday.
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What caused this selloff in the US?
The immediate trigger was lacklustre earnings from electric carmaker Tesla and Google parent Alphabet, the first of the ‘Magnificent Seven’ megacaps to report quarterly numbers this earnings season. Tesla posted its lowest profit margin in more than 5 years, even as it hiked spending on AI. Its electric vehicle deliveries have fallen for two quarters. While Alphabet beat revenue and profit estimates, investors were spooked by an advertising growth slowdown and high capital expenses. Alphabet shares skidded 5%, while Tesla plunged over 12%—the worst single-day fall since September 2020.
Are the ‘Magnificent Seven’ losing their halo?
The Magnificent Seven—Microsoft, Apple, Tesla, Amazon, Meta, Alphabet and Nvidia—have been the drivers of the AI-fuelled rally on Wall Street over the past year. But as the latest earnings show, the hype around AI, machine learning and other technologies is now giving way to questions around execution and the time needed to recoup the massive investments.
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What does it mean for the AI story?
While most stakeholders are still gung-ho about AI, expect sharper scrutiny of the business models around its deployment. As the dotcom bubble of the late 1990s showed, blindly pouring money into newfangled technology rarely ends well for either companies or investors. Training large language models and building the required computing infrastructure for AI call for billions of dollars in investment. These projects also have long gestation periods, which investors will have to start taking into account.
What does it mean for Indian markets?
On a broader level, Dalal Street will likely come under pressure if there is a prolonged downturn in the mother market of the US. A fresh wave of selling by foreign portfolio investors (FPIs) can also not be ruled out, which can put further pressure on the rupee. Sector-wise, domestic IT firms may have to reassess their AI investments as well as headcount deployments. Companies in hardware, automation and related areas too can face the market’s wrath in case there is a slowdown in new order wins.
