Market Sentiment Shifts as AI Enthusiasm Cools for Tech Giants

For much of the past decade, investors have had to pay a premium to hold shares of the world's leading technology companies. However, this dynamic is shifting as market exuberance surrounding artificial intelligence gives way to skepticism.

In recent months, technology giants have underperformed the broader market due to concerns over ballooning corporate spending on AI and a rotation of capital into sectors that typically perform better during economic expansion. Since late October, an index tracking the so-called "Magnificent Seven" tech stocks has declined by 6%, while the S&P 500 has remained largely flat. This contrasts sharply with the trend observed in 2023 and early 2024, during which the seven giants delivered returns three to four times greater than the S&P 500.

Following the recent pullback, valuations for these tech behemoths have fallen to levels rarely seen in years. NVIDIA's forward price-to-earnings ratio for the next 12 months stands just above 21 times, roughly in line with the S&P 500 and significantly below its 10-year average of 35 times. Amazon.com's forward P/E is 23 times, merely half of its 46 times average over the past decade. Excluding the uniquely volatile Tesla Motors, the combined forward P/E for the remaining giants—Alphabet, Apple, Meta Platforms, Inc., and Microsoft—is currently 23 times, its lowest level since the regional banking crisis in April of last year.

For years, these stocks commanded a significant premium over the S&P 500, supported by rapid revenue growth, soaring profits, and market dominance. This recent style shift has surprised many investors. However, some analysts view it as a natural consequence of companies like Amazon.com making massive ongoing investments in computational infrastructure for AI development.

Brett Ewing, Chief Market Strategist at First Franklin Financial Services, remarked, "The transformation occurring in the market is remarkable. The Magnificent Seven have undergone a complete repricing, forced to accelerate their transition from high-margin, asset-light companies into capital-intensive, heavy-asset enterprises."

The fundamental attractions of these stocks, such as profit growth, remain intact. According to Bloomberg Intelligence data, the collective earnings of the seven giants are projected to grow by 19% in 2026, compared to 12% for the remaining 493 companies in the S&P 500. However, their profit expansion is slowing, partly because hundreds of billions of dollars in AI investments are flooding corporate balance sheets with depreciating assets and eroding free cash flow.

The four companies making the largest investments—Amazon.com, Microsoft, Alphabet, and Meta Platforms, Inc.—are projected to have combined capital expenditures of $618 billion in 2026, up from $376 billion in 2025. Consequently, their aggregate free cash flow is expected to shrink to $94 billion this year, down from $205 billion in 2025 and $230 billion in 2024.

Ewing added, "These companies are fundamentally different from what they were a few years ago. The scale of capital expenditure, asset maintenance, and the ratio of tangible to intangible assets are now critical factors. They rightly deserve different valuation multiples and market expectations."

This shift in sentiment is most evident in the share price of Amazon.com. For years, its valuation was among the highest for large-cap stocks, driven by leading revenue growth and aggressive expansion into new markets. Its valuation is now near historic lows. Microsoft is also notable, with a forward P/E of 22 times, its lowest since 2022.

In contrast, Apple currently trades at a forward P/E of 29 times, significantly above its 10-year average of 22 times. The iPhone maker has not invested heavily in expanding its own AI computing capacity, opting instead to partner with Alphabet to develop AI features. While this strategy pressured its stock price seven months ago, improving revenue growth has led investors to appreciate its approach. Apple's capital expenditure for the current fiscal year is projected at just $13.4 billion, less than 7% of Amazon.com's estimated spending.

Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, suggested that the sell-off in some stocks may have been overdone but reflects deep investor skepticism about whether AI spending can be sustained at current levels.

She stated, "The market has started to clearly differentiate between companies with sustainable earnings growth and those whose profits may have already peaked."

She cited NVIDIA as an example. Over the past four months, the chipmaker's valuation has retreated significantly. Even after reporting strong earnings last week, its stock failed to reverse the downtrend and remains down 11% from its peak on October 29.

Despite the diminished allure of the Magnificent Seven, First Franklin's Ewing believes they remain attractive for the long term. "I don't believe the era of the tech giants is over. They still possess incredible scale, advantages, and capabilities. I am bullish on these companies long-term, but as an investor in the short term, I am not adding to positions," he said.

In other technology news, NVIDIA remains a core global player in the AI sector. The Trump administration is reportedly considering formal intervention in the industry, granting itself broad regulatory authority. Ansopic announced it will legally challenge a U.S. Department of Defense determination that it threatens the American supply chain; such authority is typically reserved for foreign adversaries, signaling an escalation in tensions with the Trump administration over AI security. Sources indicate that SoftBank Group is seeking a loan of up to $40 billion, primarily to invest in U.S. tech giant OpenAI, which would be its largest single dollar-denominated borrowing ever. Shares of Japanese chip component maker Rohm surged 18%, their largest gain in 26 years, after the company announced it had received a takeover offer from Denso.