The latest read on GDP showed the U.S. economy retreated in the first quarter -- the first time this has happened since 2022.
Economists had expected modest growth, but tariffs and trade disruption threw a wrench into the works.
The resulting uncertainty sent investors to the sidelines, but the data may be misleading.
The U.S. economy has run consistently higher over the past couple of years. However, recent concerns about tariffs, the burgeoning trade war with China, and the impact of the broader uncertainty on the economy have fueled significant stock market volatility.
Investors have been watching economic reports closely for signs of resilience. A key indicator was released Wednesday, providing some insight. Unfortunately, the news wasn't what investors were hoping for.
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With that as a backdrop, many of the so-called "Magnificent Seven" stocks --which have helped fuel the bull market over the past few years -- fell in unison. Amazon(NASDAQ: AMZN) tumbled 3.6%, Meta Platforms(NASDAQ: META) slumped 2.9%, and Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOGL) fell 2.4% as of 1:16 p.m. ET on Wednesday.
To be clear, there was very little in the way of company-specific news driving Amazon, Meta Platforms, and Alphabet stocks lower today. This seems to suggest that investors are reacting to the surprisingly weak economic news.
Image source: Getty Images.
It's all about the economy
The U.S. Bureau of Economic Analysis released its initial read on the state of the economy, which showed growth in the first quarter was weaker than predicted. The report showed that gross domestic product (GDP) in the first quarter of 2025 decreased at an annual rate of 0.3%. Economists had predicted GDP growth of 0.4%, which already marked a stark contraction compared to the 2.4% expansion in the fourth quarter.
The unexpected news comes at a critical time, as a growing number of economists fear the economy could enter a recession in 2025. Data compiled by the National Association for Business Economics revealed that 40% of economists are predicting a 50% chance of a recession occurring this year.
The most widely used definition of a recession is two successive quarters of declining GDP. If the trajectory of the economy continues along its current course, we could already be in the early days of said recession. There are fears that price increases fueled by rising tariffs could reignite inflation. This, in turn, could result in a pullback in consumer and business spending, providing all the ingredients to fuel a downturn.
The report contained a silver lining, however. The lower GDP in the first quarter was fueled by an increase in imports as companies tried to position themselves ahead of President Trump's blanket tariffs. That might seem counterintuitive, as GDP measures the domestic output of companies in the U.S. To arrive at that number, however, the government calculates the total amount of goods and services sold in the country, then backs out imports.
These calculations rely heavily on inventory estimates, which are far from perfect. Therefore, the results were likely skewed by the surge in imports ahead of the planned tariffs. Investors will want to watch for the data revision that is schedule to be released in late May, as this report will contain more comprehensive information, which could move the data one way or another.
We won't know for sure if the economy has entered recession territory until the second-quarter GDP figures are released in late July. Furthermore, the official call regarding a recession is made by the economists at the National Bureau of Economic Research, a nonpartisan, nonprofit research organization charged with tracking economic activity. The bureau's Business Cycle Dating Committee, the official scorekeeper of a recession, takes a holistic approach and considers a wide range of economic indicators, including real personal income, industrial production, retail sales, and nonfarm payrolls, before declaring a recession. This typically occurs after the recession is over.
The canary in the coal mine?
So what does this have to do with our three Magnificent Seven stalwarts?
Alphabet, Meta Platforms, and Amazon are the world's biggest providers of digital advertising. It's well documented that in the event of a downturn, businesses dial back spending, and one of the first line items in the budget to be cut is advertising -- which directly impacts our trio.
A pullback in consumer spending would hurt digital retail sales on Amazon's e-commerce platform.
Economic uncertainty will no doubt cause enterprises to preserve precious capital, which could slow adoption of artificial intelligence (AI) and dent cloud spending. As two of the Big Three cloud infrastructure providers, Amazon Web Services and Google Cloud could take a hit.
While this can be a bit unsettling, most economic downturns are generally short-lived. Furthermore, dips in the stock market have historically been excellent times for long-term investors to pick up quality companies at discounted prices.
Amazon, Meta Platforms, and Alphabet are currently selling for 29 times, 22 times, and 16 times forward earnings. These are attractive multiples, especially when you consider that each company has a long track record of execution.
For investors with the appropriate long-term outlook, buying shares of industry-leading companies represents the potential to generate significant gains over the coming three to five years, regardless of what happens in the months to come.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Danny Vena has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, and Meta Platforms. The Motley Fool has a disclosure policy.
