Why Meta Platforms, Amazon, Alphabet and other “Magnificent Seven” stocks fell on Friday

The biggest driver of the market rally since the beginning of last year has been the proliferation of artificial intelligence (AI). Many of the world’s largest companies have invested heavily to stake their claim in the resulting profit. Behind the scenes, however, are concerns about the state of the economy in general and what that could mean for the short-term direction of the stock market.

With this as a background, Meta platforms (META -3.21%) decreased by 2.8%, Amazon (AMZN -3.65%) decreased by 3.3%, Alphabet (GOOG -4.08%) (GOOGL -4.02%) decreased by 3.6% and adze (TSLA -8.45%) it was down 6.8% at 3:10 p.m. ET.

To be clear, there was nothing in the way of company-specific news to send these so-called “Magnificent Seven” stocks down today. This supports the conclusion that investors are reacting to a report that suggested the overall economy slowed faster than expected.

Image source: Getty Images.

It’s all about the economy

The monthly jobs report, courtesy of the U.S. Bureau of Labor Statistics, showed total nonfarm payrolls rose 142,000 in August from 89,000 in July, but good below economists’ forecasts of 161,000. The unemployment rate came in as expected at 4.2%.

At first glance, this would appear to be good news. A weakening jobs picture suggests the economy is slowing, making it more likely the Federal Reserve will begin cutting interest rates next month. Until now, the Fed has been reluctant to cut rates until it was confident it was winning its battle against a red-hot economy that has been accompanied by relentless inflation.

The headline numbers show that growth is slowing, giving the Fed time to start its long-awaited interest rate cuts. However, the devil is in the details, and other revelations in the report gave investors pause.

One of the most worrying factors has been the speed with which the labor market has weakened. The government released revised figures for June and July, showing 86,000 fewer jobs were created in the two months than originally thought.

The Fed tried to slow rampant inflation without tipping the economy into a recession, creating a so-called “soft landing.” Evidence so far has suggested the Fed was on track to meet that lofty goal, but downward revisions to jobs show the economy is cooling faster than originally thought. This increases the likelihood – however remote – of a recession TO they still appear.

In July, the major market indices were regularly hitting new all-time highs, but some investors are seeing the worsening jobs picture as a warning bell and are taking profits as a precaution.

The AI ​​opportunity

So what does this have to do with Meta, Amazon, Alphabet and Tesla? The common thread that binds the collective Magnificent Seven is their potential to exploit AI. Each of these companies has spent heavily to establish a bridgehead in the AI ​​revolution—and it’s easy to see why.

Estimates vary widely, but one of the most conservative analyzes suggests that the market for generative AI could be worth between $2.6 trillion and $4.4 trillion annually, according to global management consulting firm McKinsey & Company.

This will be a real exception for enterprises at the forefront of this technology. However, many smaller companies have been reluctant to invest in new and emerging technologies until the economy stabilizes, and today’s mixed data did little to provide that reassurance.

However, the future looks bright for our Magnificent Seven companies:

• Amazon and Alphabet are two of the “Big Three” cloud infrastructure providers and as such are well positioned to provide AI services to their cloud customers, reaping financial rewards.
• Meta Platforms collected a lot of data from the billions of users on its social platforms to develop the Large Language Model Meta AI (LLaMA), which the big cloud providers pay to offer on their platforms.
• Tesla has been working for years to perfect its AI-powered Full Self Driving (FSD) technology. The company recently announced that it will launch FSD in Europe and China as early as next year thanks to the latest developments in artificial intelligence.

Ultimately, there is the matter of valuation to consider, and not all Magnificent Seven stocks are created equal. The Alphabet and Meta platforms are currently trading at 20x and 24x forward earnings, extremely attractive multiples, especially in light of the opportunity. Amazon stock is selling for less than 3 times sales, which is also an attractive price. Tesla stock is expensive no matter how you slice it, at 90 times forward earnings and 7 times sales, so it’s not for every investor.

That said, if Tesla is the first to crack the code for self-driving cars, its current valuation may end up being meaningless.