The CNBC Mag 7 index has been a bellwether for the astonishing rise of the US technology sector. It is now largely unchanged since mid-September 2024, a testament to the murkier outlook for the US technology giants. Not only have they had to contend with the arrival of Chinese challenger DeepSeek, but the recent earnings season has also seen wobbles for a number of the technology names.
Part of the reason the mega caps have been able to retain their dominant position is that while expectations have been high, they have managed to keep beating those expectations. This has started to teeter in the most recent round of earnings announcements.
First up was Alphabet. The owner of Google reported revenues of $96.5bn. Analysts had expected a little higher, at $96.7bn. Even though the company reported earnings per share ahead of expectations – £2.15 versus $2.13 – shares fell more than 7% on the day. Investors were particularly worried about the group’s cloud business and whether its $75bn capital investment in AI and other areas will justify the expense as Chinese rival DeepSeek hits the market.
Amazon was also weaker than expected. The company forecast revenue for the first quarter of $151bn to $155.5bn. Analysts had been looking for $158.6bn. The market’s concerns were similar to those surrounding Alphabet: will DeepSeek hurt the company’s cloud business, and will it spend too much money trying to win dominance in artificial intelligence?
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Apple and Microsoft also saw some disappointment. Apple’s flagging iPhone sales in China are a concern, particularly with tariffs looming. Morningstar’s verdict? “Apple’s valuation is implying overly rosy expectations for long-term growth.” Microsoft results were also at the lower end of expectations and the share prices was weak in the aftermath.
Mike Seidenberg, manager on the Allianz Technology Trust, said there were pockets of strength: “For the mega caps, it’s been a mixed earnings season. Meta did so well – executing strongly, appearing to keep up with the needs for their customers in terms of giving them tools and solutions. It doesn’t sell cloud services, which is probably a positive for them. We’ve seen concerns over capacity constraints for both Microsoft and Google.
“It was not a great quarter for Alphabet and it is not just about the capacity constraints. It is a distant third to Microsoft and Amazon on cloud services. There is certainly some variability within the mega caps.”
Then there is Nvidia. The company doesn’t report until April, but there are worries. Seidenberg said: “If DeepSeek is even half true, people are rightfully concerned. Nvidia is still the leader in GPUs and it is difficult to catch. We saw that with its competitor Advanced Micro Devices, which had another not-so-good quarter.”
The problem for Nvidia, he added, is whether it will be able to protect its high pricing if workloads can be done cheaper: “That is TBD”.
The future of AI?
Along with the arrival of DeepSeek, the trajectory for AI is more complex than it was. The BlackRock Investment Institute (BII) said: “We have said artificial intelligence could reshape economies and markets even as big questions remain about what exactly that will look like – in particular, who will generate the profits. 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 release of a seemingly more efficient AI model by Chinese startup DeepSeek has renewed questions about AI capex. While these questions are valid, more spending is likely needed to unlock AI innovation – recent developments don’t change our view. Broad AI adoption is still to come, and we have barely scratched the surface of all the potential AI use cases.”
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It believes advances in AI mean these models could evolve faster than expected, pushing faster AI adoption. “This is why the AI narrative and the market’s reaction could change quickly.”
The commentary from the technology management teams suggests they are still comfortable with their AI spend, have long-term conviction in the theme and expect ongoing demand. However, it may pave the way for more competition, and usher in a new set of winners.
The BII added: “The spread of simpler, cheaper AI models could spur wider adoption by companies that need greater transparency over AI’s output….We believe AI will generate significant revenue streams, yet how those revenues will be sliced up is the big question to track.”
Tariff trouble
There is another potential wrinkle for the AI giants – their vulnerability to tariffs. In his last term, US President Donald Trump ensured a carve out for Apple, but there are no signs of that this time. Apple has a huge manufacturing base in China and now faces 10% tariffs on all the products it creates there.
For the time being, it is up to each company to determine how it will respond to the 10% tariff – they may absorb it in their profits or pass it on to consumers. Either way, it could hurt.
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There is also the problem that the technology sector is the most obvious target for retaliation for countries hurt by Trump tariffs. The EU has warned it will employ its ‘anti-coercion instrument’, a tool brought in to defend European interests during the last round of Trump tariffs. It allows the European Union to impose trade restrictions on services if a country is using tariffs on goods to force changes in policy. Trump’s threats over Greenland could trigger its use.
Technology would be firmly in the firing line. Retaliatory actions could include revoking the protection of intellectual property rights or their commercial exploitation. This continues to rumble in the background for the technology sector.
The new US administration has made it clear that AI remains a priority area, key for US economic and national security. The AI trend is not going away, but as with all new technology its development will not be linear, and the technology giants may see greater volatility as a result.
