(Bloomberg) — In the recent market selloff, the valuations of big technology companies have fallen from the lofty heights. Many traders, though, are betting that the declines may well have further to go, and recent history offers evidence to back them up.
The price that investors are paying for anticipated earnings from the so-called Magnificent Seven companies hit the lowest level since September this week as the broader S&P 500 (^GSPC) dropped 10% from its recent peak. But these valuations are still far from the lows reached in 2018 and 2022 when the profits of tech giants were under pressure, and there are now more factors clouding the horizon.
“While I acknowledge that valuations look a lot better than they did in December, I don’t think this is the bottom,” said Violeta Todorova, senior research analyst at Leverage Shares. “I have been tempted to buy this dip, but there’s still so much uncertainty out there, and I think things will get worse before they get better.”
The selloff has left a Bloomberg index that tracks the Magnificent Seven — Apple Inc. (AAPL), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA), Alphabet Inc. (GOOGL, GOOG), Amazon.com Inc. (AMZN), Meta Platforms Inc. (META) and Tesla Inc. (TSLA) — at 26 times the profits that Wall Street analysts expect over the next 12 months, according to data compiled by Bloomberg. That leaves plenty of room to fall before reaching levels that marked the lows in 2018 and 2022: around 19 times projected earnings.
Despite a rally on Friday, the tech-heavy Nasdaq 100 (^NDX) Stock Index dropped 2.5% on the week and is down 11% from a record high in February. Apple Inc. (AAPL), the index’s biggest component, suffered its biggest weekly decline in more than two years.
This represents a remarkable about-face. Just about a month ago, tech giants like Alphabet Inc. (GOOGL, GOOG) and Amazon.com Inc. (AMZN) were making new highs as investors piled into the stocks on expectations that Trump administration policies would stoke economic growth and bring regulatory relief. Those assumptions are in tatters as Trump and other officials have made it clear that they’re comfortable with stock market losses and short-term economic pain in the pursuit of their long-term ambitions to dramatically restructure the US economy.
In response, investors have retreated from risk assets and taken profits on their holdings of the tech giants, which have been the biggest winners, by far, during the bull market in US stocks that began in October 2022.
Over the past decade, investors have been taught time and time again that it pays off handsomely to buy Big Tech stocks when they are down. Even prolonged slumps like the one that sent the Nasdaq 100 (^NDX) down 33% in 2022 proved to be a great buying opportunity as beaten down stocks like Meta Platforms (META) soared to new heights in the two years that followed.
There’s near universal belief that tech giants are still the highest quality companies in the world, thanks to their market dominance, immense profitability and balance sheets loaded with cash. The question is whether these advantages are already baked into the share prices, and may now be under threat if the economy slows and big bets on artificial intelligence don’t pay off as expected.
Since closing at a record high 17 trading sessions ago, the Nasdaq 100 (^NDX) has bounced back on six days. But so far, none of the advances have lasted long.
“No one is willing to step in and catch the falling knife,” said Art Hogan, chief market strategist at B. Riley Wealth. “There’s so much uncertainty. That’s why we haven’t had a durable bounce.”
Wall Street analysts have recently trimmed their 2025 estimates for the Magnificent Seven, despite the fact that the companies, on average, posted better-than-expected earnings growth in the fourth quarter. The cohort is projected to see profit grow 22%, down from expectations of 24% in mid-January, according to data compiled by Bloomberg Intelligence. In 2024, the group posted earnings growth of 34%. Profits for the entire S&P 500 (^GSPC), by contrast, are projected to rise 12% this year, up from 10% last year.
When it comes to the Magnificent Seven, each one has a different profile. Tesla (TSLA), for example, has always been an outlier. It’s the smallest in the group, has the narrowest profit margins and highest valuation, owing to the cult-like following of its chief executive officer, Elon Musk. Even after its 48% drop over the past three months, its shares are still priced at 82 times projected profits.
The second-most expensive in the group, Apple (AAPL), now trades at a more modest 29 times forward profits. The cheapest is Alphabet (GOOG, GOOGL), at a multiple of 18. Even for Alphabet, though, that is still well above the lows it hit in 2022.
The remaining bulls do have arguments in their favor. The 14-day relative strength index of the Bloomberg Mag 7 index — a measure of momentum rather than valuation — recently fell below 24, its lowest since 2019 and lower than 30, which generally suggests oversold conditions. While it has since rebounded to 36, it remains well under the 70 level that indicates an overbought security.
For Todorova, the fundamental reasons to like Big Tech stocks remain intact despite the selloff and it’s only a matter of time until investors return to the group.
“This is really less about their fundamentals and more about the macro and geopolitical picture,” Todorova said. “Over the next few months we’ll get more clarity on the Fed’s plans, on what growth will look like, and if we see the market start to recover then, I think Big Tech can start outperforming again.”
