Stocks Churn Amid AI Angst as Weak Data Lift Bonds: Markets Wrap
2025.02.05
(Bloomberg) -- Stocks fluctuated as a slide in some of the world’s largest technology companies offset gains in several other industries. Bonds climbed after a weak reading on US services.
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Underwhelming results from Alphabet Inc. drove Google’s parent toward its worst slide in over a year. Advanced Micro Devices Inc. tumbled 8% on a disappointing outlook. Apple Inc. slid 1.1% as China is weighing a probe into its app store. Nvidia Corp. gained almost 4.5%. Treasury yields reached 2025 lows as data showed new orders placed with American service providers hit the weakest since June.
The Magnificent Seven have driven the S&P 500’s earnings expansion and equity returns, with the group comprising about one-third of the benchmark’s weight. They’ve made up more than half of the index’s gains over the past two years, but their profit growth is decelerating just as their spending rises. The concerns raise a threat to their lofty valuations, given the group trades at a 40% premium to the broader S&P 500 based on forward price-to-earnings ratios.
“Many have become skeptical that the returns on AI will justify big tech companies’ massive outlays,” said Ed Yardeni, founder of his namesake research firm.
The S&P 500 was little changed. The Nasdaq 100 lost 0.1%. The Dow Jones Industrial Average rose 0.1%. UnitedHealth Group Inc. slid 2.5%. The insurer said it contacted the US Securities and Exchange Commission with concerns about investor Bill Ackman’s since-deleted X post suggesting the company overstated profits. Uber Technologies Inc. slid 7% on a weak gross bookings guidance.
The yield on 10-year Treasuries declined nine basis points to 4.42%. The Bloomberg Dollar Spot Index fell 0.3%.
The biggest companies — often called the Magnificent Seven — have been increasing their business outlays on things like property and equipment, spending 40% more on the category in 2024 than the year before, according to strategists at Societe Generale SA. The rest of the S&P 500 grew capital expenses by just 3.5% last year, the strategists added.
“Over the past year, investors expressed concern about the monetization of AI investment,” said Mike O’Rourke at JonesTrading. “The investment is getting significantly larger, and the field of competition will also grow more rapidly with lower development costs.”
That amount of spending by big tech came under even heavier scrutiny after Chinese AI startup DeepSeek took Silicon Valley by surprise last week when it said it had created a powerful AI model at a fraction of the cost of US rivals.
“The release of a seemingly more efficient AI model by Chinese startup DeepSeek has renewed questions about AI capex,” said BlackRock Investment Institute strategists including Jean Boivin and Wei Li. “We are in the AI buildout, with total capital investment by the “magnificent seven” mostly mega cap tech stocks on par with government R&D.”
The strategists say they see a “broadening set of AI beneficiaries” and stay overweight US stocks.
“Within the US, we still like the large caps, but have grown increasingly interested in the S&P 493,” Yardeni said. “We think there’s room for the ex-Mag-7’s collective profit margin to expand as productivity increases and the high-tech solutions (i.e., artificial intelligence, automation, etc.) utilized and churned out by the Mag-7 firms are implemented.”
While he doesn’t believe the Magnificent Seven are grossly overvalued, Yardeni sees room for the S&P 493 to outperform as its collective multiple expands above 20 times forward earnings.
Corporate Highlights:
Chipotle Mexican Grill Inc.’s sales rose less than expected, highlighting the high bar the company set by defying an industrywide traffic slowdown in recent years.
Walt Disney Co. reported fiscal first-quarter results that topped analysts’ estimates, fueled by the blockbuster film Moana 2 and higher income from its streaming services.
Johnson Controls International Plc jumped following a boost in its profit forecast and the hiring of a new chief executive officer.
Electronic Arts Inc. reported third-quarter earnings and provided further context on the underperformance of EA Sports FC, which had been a source of concern for investors.
Harley-Davidson Inc. reported revenue for the fourth quarter that missed the average analyst estimate.
Match Group Inc. named Zillow Group Inc. co-founder Spencer Rascoff as its new chief executive officer, replacing Bernard Kim who has struggled to end a persistent decline in subscribers to the company’s flagship dating app Tinder.
Snap Inc. issued a disappointing earnings outlook, taking away from stronger-than-expected revenue gains in the last quarter.
Key events this week:
Eurozone retail sales, Thursday
UK rate decision, Thursday
US initial jobless claims, Thursday
Fed’s Christopher Waller, Lorie Logan speak, Thursday
Amazon earnings, Thursday
US nonfarm payrolls, unemployment, University of Michigan consumer sentiment, Friday
