'Magnificent Seven' stocks see worst drop since launch of ChatGPT - with $1.7 trillion in value erased in 2 weeks

By Joseph Adinolfi

The group of highflying megacap stocks has officially entered correction territory

The wheels appeared to be coming off the artificial-intelligence trade on Wednesday as members of the "Magnificent Seven" booked their worst daily drop since the launch of ChatGPT.

ChatGPT launched in November 2022. But the Magnificent Seven stocks finished down 4.6% on Wednesday, their worst drop since September of that year, according to a market-cap weighted gauge maintained by Dow Jones Market Data.

Since their most recent peak on July 10, the group of stocks have fallen more than 10% through Wednesday's close, leaving them firmly in correction territory for the first time since October.

The Roundhill Magnificent Seven ETF MAGS saw an even bigger decline on Wednesday, and finished down more than 11% from the July 10 close.

During this time, the Magnificent Seven stocks have collectively erased more than $1.7 trillion from their market capitalization. More than $768 billion was wiped away on Wednesday alone - the biggest one-day drop on record for the group dating back to when Facebook parent Meta Platforms Inc. (META) went public in 2012.

Megacap technology stocks have hit the skids in July since a softer-than-expected inflation report rekindled expectations for multiple Federal Reserve interest-rate cuts between now and the end of 2024, with the first expected to arrive in September.

With the start of the Fed rate-cutting cycle appearing imminent, small-cap and value-oriented names have charged ahead after lagging behind the S&P 500 and Nasdaq Composite for most of 2024.

Information technology stocks finished down more than 4% on Wednesday XX:SP500.45, the group's worst day since September 2022. The consumer discretionary sector, which also includes two members of the Magnificent Seven, Tesla Inc. (TSLA) and Amazon.com Inc. (AMZN), also saw its worst day since September 2022.

The day's selloff was inspired by the latest batch of earnings from Tesla and Google parent Alphabet Inc. (GOOGL) (GOOG), the first two members of the Magnificent Seven to report results since the start of the summer earnings season. Visa Inc. (V) shares also slumped after the credit-card giant's earnings offered more signs of a weakening consumer.

But it was the results from the Magnificent Seven names that appeared to garner most of the attention from investors, as they missed what had been described as a "high bar" set by Wall Street.

Tesla reported a 40% drop in profits. Its shares were down nearly 11% on Wednesday as a result, on track for their worst drop since January, Dow Jones data showed.

On the other hand, Alphabet surpassed expectations for profit and sales growth, but ad revenues from its YouTube segment weren't quite as strong as analysts had hoped.

But perhaps the most damaging details from the two earnings reports were signs that Alphabet's aggressive investment in AI might take longer than hoped to pay off. The company's shares were down nearly 5% in recent trade.

"There were signs that it's going to take longer for them to see a payoff from their investment in AI," said Kim Caughey Forrest, founder and chief investment officer at Bokeh Capital Partners, during a Wednesday call with MarketWatch. "To me, that is key."

Investors appear to have been blindsided by the selloff in the Magnificent Seven stocks over the past two weeks - but there were signs nonetheless.

According to data from BondCliQ, investors have been dumping corporate bonds issued by Magnificent Seven members for the past two weeks, although the sales haven't had much of an impact on yields. Bond yields move inversely to prices.

Aside from Tesla and Alphabet, Microsoft Corp. (MSFT), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META) and Nvidia Corp. (NVDA) are also members of the Magnificent Seven.

As tech stocks slumped, the small-cap Russell 2000 index RUT and value-oriented Dow Jones Industrial Average DJIA also moved lower - but their losses were relatively more modest. Both gauges have outperformed since the start of July.

Other corners of the market saw strength persist, with utilities stocks XX:SP500.55 and healthcare stocks XX:SP500.35 seeing notable gains.

But their strength wasn't enough to prevent the S&P 500 SPX from snapping a 365-day streak without a 2% decline, its longest since 2007.

The tech-heavy Nasdaq Composite COMP was down by 3.6% at 17,342.41, its worst day since October 2022.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

07-24-24 1810ET

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