In July 2024, the US stock market experienced a severe shock, and the technology industry suffered a heavy blow. This storm not only caused the "tech giants" to evaporate trillions of dollars in market value, but also resulted in the Nasdaq Composite Index experiencing its first daily decline of over 3% in 400 trading days.
This adjustment is actually a concentrated reflection of multiple key trends: the gap between AI technology breakthroughs and commercialization, the realignment of high-tech company valuations and fundamentals, investors' demand for risk diversification, and the impact of macroeconomic factors. This large-scale rotation marks a shift in investors' thinking patterns, reminding them that even revolutionary technological trends require time to realize their greater potential.
The Challenge of AI Monetization
Google's parent company Alphabet was the first to release its second quarter financial report for this year. According to the financial report, Alphabet's capital expenditures during the reporting period amounted to $13.2 billion, exceeding analysts' expectations of $12.2 billion. These investments are mainly used to support the development of AI technology and enhance computing power, demonstrating Alphabet's determination to go all out in the AI race.
However, the large-scale investment has not yet translated into significant income growth. Although Google's cloud business has performed well with a profit of $1.17 billion, exceeding analysts' expectations of $982 million, Google's market share in cloud computing still lags behind Amazon's AWS and Microsoft's Azure.
Moreover, the rise of emerging competitors such as OpenAI poses a direct threat to Google's core business. Recently, OpenAI announced the launch of its SearchGPT search product, which, although still in its early stages, has already attracted widespread attention in the market. This product aims to provide simpler and more direct search results, which may attract users who are tired of the complicated results of traditional search engines. If SearchGPT successfully gains a large number of users, it may affect Google's market share.
Google's business model heavily relies on search advertising revenue. In 2023, Google generated $175 billion in revenue from its search and related advertising business. If SearchGPT or similar AI driven search tools succeed, it could put enormous pressure on Google's advertising revenue and even shake its dominant position in the digital advertising market.
In fact, the stock price has already reacted, with Alphabet falling 6% in the past week, the largest weekly decline since February this year.
Tesla's autonomous driving dream delayed
Tesla's situation is more complex than other tech giants. Since the annual shareholders' meeting last month, Tesla's stock price has risen by 35%, mainly due to investors' optimistic expectations for its artificial intelligence and autonomous driving technology. However, this optimism was severely dampened after the company announced the postponement of the launch of its Robotaxi business.
Autonomous driving is one of Tesla's core strategies. CEO Musk has repeatedly promised to achieve fully autonomous driving, but has yet to fulfill his promise. Delaying the launch of Robotaxi not only means that technological progress is not as expected, but may also be due to cash flow issues, which in turn affect the company's long-term development strategy.
The financial report data further intensified market concerns. Tesla's basic gross profit margin for the second quarter (excluding policy subsidies) fell below 15%, only half of what it was two years ago. This decline is mainly due to fierce price competition and rising production costs. It is worth noting that Tesla's revenue from selling greenhouse gas credits accounted for nearly one-fifth of the total profit for the quarter, and this reliance on policy subsidies further raises questions about the company's core business profitability.
In addition, Tesla faces dual competition from traditional automobile manufacturers and emerging electric vehicle companies. As more companies launch electric vehicle models and invest in autonomous driving technology, Tesla's technological advantages and market share may face challenges.
In the coming months, the market will closely monitor Tesla's progress in autonomous driving technology, especially with the launch of its robot taxi business in October, which may become a key factor in determining Tesla's stock price direction and investor confidence.
The change in investor sentiment
The second quarter financial reports of tech giants have triggered a significant shift in investor sentiment. The market no longer blindly pursues the concept of AI, but evaluates the actual profitability and growth prospects of technology companies more rationally. Investors are beginning to realize that despite the vast prospects of AI technology, it may take longer than expected to translate into actual returns.
This emotional shift is directly reflected in the stock price performance of the "Seven Heroes of Technology". Since reaching its peak on July 10th, the seven most valuable technology companies in the United States have collectively evaporated trillions of dollars. Among them, Nvidia and Tesla experienced the largest decline, both dropping 17% from their peak in July; Meta and Alphabet have fallen 14% and 13% respectively from their July highs; Apple, considered a safe haven, also fell 7% from its peak; The stock prices of Microsoft and Amazon have fallen by about 9% from their highs.
The significant pullback not only reflects the market's reassessment of the commercialization process of AI technology, but also exposes investors' concerns about the high valuations of these companies. Taking Nvidia as an example, although its position in the AI chip field is indisputable, its stock price has risen by more than 120% since the beginning of the year. Whether this increase can be supported by future profit growth has become a focus of market questioning.
David Lundgren, portfolio manager of Xiaogang Investment Advisor, pointed out that companies cannot just meet expectations, they must also exceed them. The market's expectations for tech giants have reached an extremely high level, increasing the financial pressure on these companies. Any slight mistake could lead to significant fluctuations in stock prices.
Big wheel movement has occurred
As enthusiasm for technology stocks cools down, funds begin to flow towards other long neglected sectors. This large-scale stock market rotation has been described by some analysts as an "unprecedented stock market rotation". Small cap stocks, especially the Russell 2000 index representing small cap stocks, have performed exceptionally strongly, with gains exceeding those of the S&P 500 index in the past week, marking the first occurrence since the 1980s.
It is worth noting that the US stock market has accumulated a significant increase before. From a technical perspective, the S&P 500 index was once 15% higher than its 200 day moving average, which is a greater deviation than the situation before the sharp decline in early 2018. In the past few years, only a few key moments have experienced larger deviations.
Market volatility is closely related to expectations of Federal Reserve policies. The overnight US Treasury yield curve has become steeper, reflecting market expectations that the Federal Reserve may cut interest rates earlier than expected. Based on the statements of Federal Reserve officials in the past period, there is a high possibility of a rate cut in September.
The market has fully anticipated the interest rate cut in September, but if it fails, it may have further negative impacts on the US stock market trend. In addition, the Bank of Canada announced a 25 basis point interest rate cut due to a significant drop in inflation, sparking bold speculation in the market about the policies of other major central banks.
Key factors affecting the trend of the US stock market
The trend of the US stock market in the coming weeks will be influenced by multiple key factors, and financial reports are crucial. Technology giants such as Apple, Meta, Microsoft, and Amazon have successively released their financial reports, and whether their investments in the AI field can be converted into actual returns has become a focus of market attention.
The interest rate decisions of the Federal Reserve and the Bank of Japan have attracted much attention. Investors are looking for signs suggesting that the Federal Reserve will cut interest rates early, while also speculating whether the Bank of Japan will initiate a rate hike and reduce its balance sheet. Inflation data, employment reports, and other macroeconomic indicators from important markets such as the United States will continue to affect the market's assessment of the global economic outlook.
Some large hedge funds have increased their allocation to cyclical industries and reduced their exposure to technology stocks. This shift in capital flow may continue for some time until the valuation of technology stocks returns to a more reasonable level.
Despite significant short-term adjustments, many institutional investors remain optimistic about the long-term prospects of technology stocks. Goldman Sachs' report points out that although some hedge funds reduced their holdings of AI related stocks such as Meta, Microsoft, and Nvidia in the first quarter, the "tech giants" (excluding Tesla) remain their most popular long-term positions. The progress of AI technology will continue to lead the market. The innovative products launched by emerging companies like OpenAI may have a profound impact on the entire technology industry, changing the existing market landscape.