Big tech stocks were expensive. Then the market turned on AI

By Jeran Wittenstein and Ryan Vlastelica, Bloomberg

For most of the past decade, investors have had to pay exorbitant prices to own a piece of the world’s biggest technology companies. But that’s changing as AI euphoria gives way to skepticism.

Big Tech stocks have been underperforming for months due to concerns about ballooning spending on artificial intelligence and a rotation into sectors that tend to do well in an expanding economy. An index of the so-called Magnificent Seven giants is down 6% since the end of October while the S&P 500 Index is basically flat. That’s a reversal from 2023 and 2024, when the Mag Seven tripled or quadrupled the S&P 500’s return.

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After the recent downturn, many of those tech behemoths are now trading at valuations rarely seen. Nvidia Corp. is priced at a little more than 21 times forward earnings, which is basically the same as the S&P 500 and down from its 10-year average of 35 times. Amazon.com Inc. shares are priced at 23 times forward earnings, half their average multiple over the past decade of 46. Excluding long-time outlier Tesla Inc., the group — which also includes Alphabet Inc., Apple Inc., Meta Platforms Inc. and Microsoft Corp. — trades for 23 times estimated profits, the cheapest since the tariff tantrum in April.

The shift has taken many investors by surprise following years in which the stocks traded at a significant premium to the S&P 500 thanks to rapid revenue growth, booming profits and dominant market positions. To some, however it’s a natural outgrowth of companies like Amazjsut on pumping ever-greater piles of cash into computing infrastructure to develop AI.

“It’s amazing the transformation we’ve seen in markets,” said Brett Ewing, chief market strategist at First Franklin Financial Services. “There’s been a complete repricing of the Mag 7 because they underwent a transformation from asset-light companies with massive cash flows, to companies that have been forced to move at an accelerated pace into becoming asset-heavy.”

Many of the characteristics that made the stocks so attractive, like profit growth, remain intact. Magnificent Seven earnings are expected to rise 19% in 2026, compared with 12% for the other 493 companies in the S&P 500, according to data compiled by Bloomberg Intelligence. But the group’s earnings expansion is slowing, in part because the hundreds of billions of dollars they’re spending on AI has saddled the companies’ balance sheets with loads of depreciating assets while sapping free cash flows.

The biggest spenders — Amazon, Microsoft, Alphabet and Meta — are projected to plow $618 billion combined into capital expenditures in 2026, up from $376 billion in 2025. As a result, their collective free cash flow is expected to shrink to $94 billion this year, compared with $205 billion in 2025 and $230 billion in 2024.

“These companies look a lot different than they did just a few years ago. Capex levels matter, maintenance matters, the ratio of physical assets to soft assets matters,” Ewing said. “They deserve different multiples and different expectations.”

That change in sentiment is most evident in Amazon’s stock price. For years, it commanded one of the highest valuations among megacaps as revenue growth outpaced peers and the company invested aggressively in new markets. But now it’s trading near the lowest on record. Microsoft is also notable, with its shares priced at 22 times forward earnings, the lowest since 2022.

On the flip side, there’s Apple, which is trading for 29 times estimated profits, well above its 10-year average of 22.

The iPhone maker isn’t spending gobs of cash in the race to expand AI computing capacity, instead partnering with Google to power artificial intelligence features. While that approach put Apple shares in the doghouse just seven months ago, investors have warmed to its strategy amid improving revenue growth. Its capital expenditures are projected to be just $13.4 billion in its current fiscal year, less than 7% of what Amazon is expected to spend.

While the selloff in some of these stocks has probably gone too far, it’s also a sign of just how skeptical investors are about AI spending continuing at the current pace, according to Lisa Shalett, chief investment officer of Morgan Stanley’s wealth management arm.

“It has become really clear that the market is starting to discriminate between the companies seen as having sustainable earnings growth, and those that are starting to exhibit earnings that could be at peak levels,” Shalett said.

She points to Nvidia as a prime example. The chipmaker’s valuation has collapsed over the past four months, and even a banner earnings report last week wasn’t enough to lift the stock out of a slump that’s left it down 11% from an Oct. 29 peak.

Still, even though some of the Magnificent Seven’s luster has faded, the stocks remain attractive in the long run, according to First Franklin’s Ewing.

“I don’t think the age of Big Tech is over,” he said. “They continue to have amazing size and scale, and what they’re able to do is amazing. I’m positive about the companies over the long term, but in the short term, just thinking as an investor, I’m not adding money.”

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