What the Magnificent Seven’s $1.7 trillion meltdown tells us about the economy

What the Magnificent Seven’s .7 trillion meltdown tells us about the economy

The Magnificent Seven that powered the market’s rise have been hammered.

Nvidia, the poster child for the boom in artificial intelligence stocks, lost more than $US200 billion of market value last Friday, and its share price is down about 16 per cent since the CPI release, bringing the total loss of value since April 11 to about $US360 billion.

Over the same period, Microsoft has lost $US214 billion of value, Apple $US170 billion, Amazon $US150 billion, Meta Platforms (Facebook’s parent) $US92.5 billion, Tesla $US88 billion and Alphabet (Google’s parent) $US31.3 billion.

The Magnificent Seven that had powered the market’s rise have been hammered.

Tesla, of course, effectively stopped being magnificent some time ago. Its share price peaked at more than $US400 in late 2021. It’s now about $US147, having started this year at just under $US250 a share. From its 2021 peak, Tesla has lost more than $US800 billion of market capitalisation.

The aura of invincibility that once surrounded Elon Musk and Tesla has been punctured by slowing growth in the electric vehicle market, massive discounting in both the Chinese and American markets for EVs amid a flood of new low-cost Chinese vehicles, and the abandoned plans to build a new low-cost car of its own in favour of a risky bet on robotaxis.

Apple hasn’t had a good year either. As its revenue stagnated, its share price has fallen more than 15 per cent so far. Its market share in China has been falling and Samsung succeeded it as the biggest seller of smartphones.

The other five big tech stocks have, however, been performing well – Nvidia’s blockbuster first-quarter result hasn’t helped it escape the carnage – so the explanation for their declines appears to lie in the macro environment, rather than the micro.

It’s not the US economy that is directly at fault. It has been growing solidly, although the longer US interest rates remain at their current levels (or even rise), the more vulnerable the economy and stocks will be. The earnings of US companies so far this year have outperformed expectations.

Indirectly, with its labour market tight, consumer demand strong, and housing-related costs rising amid a housing shortage, it is the strength of the economy that is generating inflation at levels still too high for the Federal Reserve to be able to contemplate rate reductions.

Bond yields rose after the March CPI release– the two-year yield has jumped about 25 basis points to within basis points of 5 per cent and the 10-year yield has similarly climbed – which makes that market a more attractive and lower-risk alternative to the sharemarket.

The other influence on the markets in the past week or so has been the heightened geopolitical risk emanating from the Middle East. The tit-for-tax strikes Iran and Israel launched on each other increased the risk of a major and broader conflict within the Middle East, which unsettled investors.

After a modest tremor, however, the commodity most sensitive to increased risk within the region is oil, has fallen back. Having traded above $US90 a barrel early in the month, it is now priced at around $US87 a barrel, suggesting traders don’t anticipate any escalation of hostilities.

Similarly, the VIX index, which measures volatility and expected volatility (and is often called the “fear index”), has slipped back to 18.7 after hitting a six-month high of 19.6 during the missile exchanges last week.

That makes it pretty clear that the twinned courses of inflation and interest rates will remain the biggest influences on the sharemarket through the rest of the year. Any sign that even a single rate cut was on the Fed’s horizon would be positive.

US Federal Reserve chairman Jerome Powell has backed away from providing guidance on when rates may be cut.Credit: Bloomberg

There’s a personal consumption expenditure index reading due out this Friday which, because it is the Fed’s preferred measure of inflation, could be quite influential, although the consensus seems to be that it will reflect the same slight increase in inflation that the CPI data showed.

There is a spate of big tech quarterly earnings reports due over the next couple of weeks – Microsoft, Meta, Alphabet, and Tesla report this week – and an expectation of (with the possible exceptions of Tesla and Apple) very strong growth.

In an overall market where corporate earnings growth is expected to be quite modest, the Magnificent Seven are expected to report combined earnings growth of close to 40 per cent.

There are some foundations for their share price performances over the past six months that help validate growth that, even after what has been a quite savage sell-off in the past seven trading days, is still quite spectacular.

Including – but beyond – the Magnificent Seven, a broader group of big tech companies’ share prices are still up more than 20 per cent this year.

In terms of the original question, the outcome will be dependent on the Fed and the inflation rate.

Any prospect of a rate cut this year (two would be even better) will put a floor under the markets. If that prospect disappears (or, worse, a rate rise looms) then the recent sell-off could evolve from a modest, if sharp, correction to something significantly more disconcerting and value-destructive.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.