AI Spending Concerns Shake Tech Giants

Summary:

The recent emergence of DeepSeek as an AI rival and Alphabet's disappointing earnings have raised doubts about the profitability of Big Tech's AI investments. The "Magnificent Seven" tech giants, which have driven the S&P 500's growth, are facing decelerating profit growth amid rising capital expenditures.

Key Points:

* Nvidia lost $500 billion in market value after DeepSeek's threat.
* Alphabet's capital expenditure announcement of $75 billion exceeded expectations.
* Year-over-year earnings growth for the "Magnificent Seven" peaked in 2023 and is expected to continue slowing.
* The gap in valuations between the "Magnificent Seven" and the broader market is narrowing.
* Alphabet's cloud unit, a bellwether for AI spending, underperformed expectations.
* Geopolitical concerns and the emergence of DeepSeek add pressure to tech giants.

Analysts' Insights:

* Andrew Lapthorne (Societe Generale SA): CapEx growth of the "Magnificent Seven" significantly exceeds the rest of the S&P 500.
* Kristian Heugh (Morgan Stanley): Earnings growth for the "Magnificent Seven" is declining while improving for the broader market.

Conclusion:

Investors are questioning the long-term value of Big Tech's AI spending as the "Magnificent Seven" face increased competition, decelerating growth, and rising costs. While exposure to these tech giants was previously crucial for fund managers, its importance may diminish as the market shifts.