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Reporter of China Business Network: Wen Qiao Intern reporter of China Business Network: Yue Chupeng Editor of China Business Network: Lan Suying

The historic rotation of U.S. stocks has begun, and the high-flying technology stocks suffered another setback this week.

On July 24th (Wednesday) local time, including Google,apple、MicrosoftThe "Big Seven" of U.S. technology stocks, including , Meta, encountered their "darkest moment", with a single-day market value of $768 billion evaporating, the largest single-day drop since October 2022, and the biggest setback for technology stocks since ChatGPT detonated the AI ​​market. The Nasdaq Composite Index, which is dominated by technology stocks, also plummeted by more than 3.6%, setting the largest single-day drop since the end of 2022.

Judging from the weekly performance, the "Big Seven" all fell this week, and the total market value has shrunk by about $2 trillion since July 10. In fact, before this round of selling, the analysis of the AI ​​"bubble theory" had heated up in the market, and many investment banks made bearish remarks, questioning whether large-scale investment in the AI ​​field can bring corresponding returns in the future.

The second quarter financial report released by Google's parent company Alphabet further confirmed Wall Street's concerns. After sorting out the revenue of Google's cloud business and search business, the reporter of "Daily Economic News" found that in the past year, the revenue growth of these two AI-related businesses has not continued to rise steadily, and the growth rate cannot match Google's investment in research and development. Therefore, despite better-than-expected performance, Google closed down more than 5% on the 24th, the worst performance in six months, and fell nearly 3% the next day.

The rare setback of the "Big Seven" may be a witness to a new turning point in the AI ​​wave. Next week, technology giants such as Microsoft, Apple, and Meta will release their financial reports, and the market may face a greater test.

Google's financial report: AI business growth is difficult to match huge spending

For Wall Street investors, July 24 local time was the most thrilling trading day since the beginning of the year:TeslaDriven by the trend of a sharp decline due to poor performance in the second quarter of this year, the "Big Seven" of the US stock market, which has been advancing rapidly in the past two years, suffered the largest single-day decline since October 2022, officially falling into the 10% correction range, and the market value of the US stock market evaporated by more than 1.1 trillion US dollars throughout the day. Among them, Tesla closed down more than 12%, and Apple had the smallest decline, about 2.9%.

On that day, the S&P 500 fell more than 2% and the Nasdaq Composite fell more than 3.6%. Both indexes recorded their largest single-day declines since the end of 2022.

The reason why technology stocks suddenly suffered this "disaster" is that the market realized that this grand AI narrative, although accompanied by high costs and investments and has lasted for nearly two years, still seems to have not found a path to achieve returns that match the investment.

After the U.S. stock market closed on July 23, Google's parent company Alphabet released its second-quarter earnings report this year. Its search and cloud businesses grew well, but YouTube's video platform advertising revenue fell short of expectations. In addition, Google expects its expenses to grow further in the third quarter, leading investors to worry about its future profit margins. More importantly, the earnings of the AI ​​department once again disappointed Wall Street. As of the close of the U.S. stock market that day, Google fell sharply by more than 5%.

The reporter from Meijing noted that Google's main businesses are divided into Google Search, Youtube Advertising, Google Services, Google Cloud, etc., and the search business and cloud business are closely related to AI.

After carefully breaking down the revenue of recent quarters and comparing it with the R&D expenditures of the current quarter, the reporter found that over the past year, the revenue growth of Google's cloud business and search business has not continued to rise steadily, and the growth rate is far from matching Google's increased investment in R&D.

According to foreign media reports, Alphabet invested $2.2 billion in DeepMind and Google Search divisions to build AI models in the second quarter of this year, an increase from $1.1 billion in the same period last year, but it remains unknown when AI will begin to generate revenue for the cloud business or even the advertising business.

Although Alphabet did not disclose the specific proportion of its total AI R&D investment in its financial report, a recent environmental report released by Google revealed the scale of its AI investment. In 2023, the company's carbon dioxide emissions increased by 13% compared to 2022 in order to expand its AI data center.

Not only that, Alphabet plans to invest at least $12 billion per quarter by the end of 2025, even if this may affect profit margins. Google CEO Sundar Pichai emphasized in the earnings call that the risk of underinvestment is far greater than the risk of overinvestment.

In addition to Google, OpenAI was also reported by foreign media to be likely to lose $5 billion this year. The company's full-year revenue is estimated to be between $3.5 billion and $4.5 billion, but the total cost may be as high as $8.5 billion.

Goldman SachsIn a June 27 report, the company analyzed the massive investments made by tech giants in AI infrastructure, including investments in data centers, chips, other AI infrastructure, and power grids. However, so far, these investments have shown little noticeable results.

David Cahn, a partner at Sequoia Capital, also pointed out that the technology industry needs to generate about $600 billion in annual revenue to make up for all current investments in AI, but is currently far from reaching this figure.

Is the “AI bubble” bursting faster? Wall Street debates

As giants leading the generative AI wave, Google and OpenAI's challenges in AI revenue have also exacerbated Wall Street's concerns about whether AI can become a growth driver.

The reporter of Meijing noted that before this sharp market adjustment, the "AI bubble theory" had existed for some time. Some people believe that the rapid development of AI has given rise to a bubble, which has brought $9 trillion in added value to the S&P 500 index in the past year.

Earlier this year,Morgan StanleyThe release warned that the strong performance of the stock market at the end of 2023 has pushed equity valuations to levels that may not be sustainable. Current price-to-earnings expectations and low equity risk premiums suggest that investors face limited upside and increased risks.

According to data from the London Stock Exchange, the price-to-earnings ratio of the S&P 500 index is close to 22 times expected earnings, the highest level in more than two years and much higher than the average level of the past 10 years (18 times). Although the sharp drop in the "Big Seven" technology stocks on Wednesday may not be the beginning of a bubble burst, the huge drop is exacerbating investor concerns.

Hedge funds have been reducing their exposure to U.S. stocks over the past two weeks, according to Morgan Stanley and Goldman Sachs, due to concerns that a shift in sentiment around technology stocks could erase gains made earlier this year. Morgan Stanley said on July 25 that computer-driven macro hedge fund strategies sold $20 billion in stocks on Wednesday and expected to sell at least $25 billion in the coming week, one of the biggest risk liquidations in a decade.

The shift in market sentiment, amid an accelerated rotation into technology stocks, is also one of the possible factors that exacerbated the recent market decline.NvidiaThe demand for put options exceeded that for call options, reaching a five-month high. In addition, some analysts believe that the recent headwind for technology stocks is also due to the rapid increase in expectations for a rate cut by the Federal Reserve, which has accelerated the outflow of funds from the U.S. stock market.

However, in the view of some other analysts, the market's reaction this time is excessive and more of a short-term fluctuation. They believe that in the upcoming US stock earnings season, Wall Street will better digest the performance of technology giants and the broader development trend of AI technology.

“While investors may be concerned about the massive spending wave and frustrated that these investments will result in profit growth rates or margins that are difficult to achieve ... we strongly disagree with this pessimistic view as this spending wave further confirms that the AI ​​revolution is real,” Wedbush analysts led by Dan Ives wrote in an investor note.

Wedbush also reiterated its bullish stance on U.S. technology stocks and once again predicted that the tech-focused Nasdaq Composite Index will rise another 15% to 20% by the end of this year.

Truist's chief investment officer expressed a similar view, writing in a report: "Although technology stocks are correcting after their strongest two months of performance since 2022, the long-term bull market is expected to remain intact."

Dan Coatsworth, an investment analyst at investment platform AJ Bell, believes that next week, Microsoft, Meta, Apple andAmazonwill release their performance results one after another, and Nvidia will release its financial report at the end of August. Once the data is released, we may know whether this is a necessary adjustment to eliminate the bubble.