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Investors are demanding nothing less than perfection from tech titans this earnings season as the “Magnificent Seven” tech companies, driving the stock market’s growth and profits, face increased scrutiny. Meta Platforms, the parent company of Facebook, marked its best sales growth in over two years, initiated a dividend, and increased its share-buyback authorization by USD 50 billion, resulting in a 20% surge in shares. Amazon also reported a 7.9% increase following robust holiday spending. 

Despite exceeding Wall Street forecasts, Alphabet, Microsoft, and Apple faced market dips due to underperformance in key business segments. The day following its report, Alphabet experienced a significant 7.5% drop, marking its worst session since October. Simultaneously, Apple slipped by 0.5%, sustaining a sell-off throughout the week. Microsoft, on the other hand, faced a 2.7% decline immediately after its results were released but managed to rebound, concluding the week with a positive uptick of 1.8%. 

George Maris, CIO at Principal Asset Management, noted the market’s cautious response, stating, “It’s because there’s so many people that have crowded into it—anything that was perceived to be, ‘Well, this isn’t completely bulletproof. We’re out.’” 

The Magnificent Seven, driven by expectations of benefiting from the AI boom, contributed significantly to the stock market’s repeated records. Excluding Tesla, they are projected to report a substantial 62.8% earnings jump for Q4, in stark contrast to the expected 8.6% decline for the other 494 S&P 500 companies. 

Analysts suggest recent tech sector stumbles indicate challenges in justifying high valuations. The big question for investors revolves around the timeframe for AI spending to translate into tangible revenue and profit. However, as of now, the returns from these investments remain modest. 

Tech stocks faced additional pressure from diminished hopes for near-term interest rate cuts, resulting in a 1.6% fall in the S&P 500, marking its worst day since September, after Federal Reserve Chair Jerome Powell announced an unlikely March rate cut. Some investors remain unfazed by the recent selloffs, emphasizing a focus on long-term fundamentals. 

Nael Fakhry, portfolio manager of the Osterweis Fund, which holds shares in Microsoft, Alphabet, and Amazon, remarked, “We’re not going to get overly exercised over a short-term negative move unless the fundamentals have really changed.”  

Alphabet and Microsoft, despite periodic sell-offs, have shown strong overall performance, outperforming the S&P 500. Concerns persist about buying tech stocks at high prices, with some warning that narratives, while often true, may already be fully reflected in share prices. Rob Arnott, chairman at Research Affiliates, highlights the risk, stating, “Narratives have the benefit of being largely true but also have the disadvantage of being fully reflected in share prices.” 

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