The biggest driver of the market rally since early last year has been the proliferation of artificial intelligence (AI). Many of the world’s largest companies have invested heavily to stake their claim on the resulting windfall. However, just behind the scenes, concerns have been simmering about the state of the broader economy and what this might mean for the near-term direction of the stock market.
With that as a background, Meta platforms (NASDAQ: META) was down 2.8%, Amazon (NASDAQ: AMZN) fell 3.3%, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) decreased by 3.6% and Tesla (NASDAQ: TSLA) fell 6.8% as of 3:10 p.m. ET.
To be clear, there was no company-specific news to drive these so-called “Magnificent Seven” stocks lower today. That supports the conclusion that investors are reacting to a report suggesting the broader economy is slowing faster than expected.
It’s all about the economy
The monthly jobs report, courtesy of the U.S. Bureau of Labor Statistics, showed that total nonfarm payrolls rose by 142,000 in August, up from 89,000 in July, but Good below economists’ forecasts of 161,000. The unemployment rate came in as expected at 4.2%.
On the surface, this seems like good news. A weakening jobs picture suggests the economy is slowing, making it more likely that the Federal Reserve will cut interest rates next month. Until now, the Fed has been reluctant to cut rates until it was confident it was winning the battle against a red-hot economy coupled with relentless inflation.
The headline numbers showed growth slowing, giving the Fed cover to begin long-awaited rate cuts. But the devil is in the details, and other revelations in the report gave investors pause.
One of the most worrying factors was the speed at which the labor market weakened. The government released revised figures for June and July, showing that 86,000 fewer jobs were created in those two months than originally thought.
The Fed has been trying to slow rampant inflation without plunging the economy into recession, thus achieving a so-called “soft landing.” The evidence so far suggests the Fed was on track to achieve this lofty goal, but the downward revisions to employment show the economy is cooling faster than originally thought. That increases the likelihood — however small — of a recession. could be still occur.
Major market indices continued to regularly hit new record highs in July, but some investors are seeing the deteriorating employment situation as a warning sign 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 ties the Magnificent Seven collectively together is their potential to exploit AI. Each of these companies has spent a lot of money to establish a beachhead in the AI revolution — and it’s easy to see why.
Estimates vary widely, but one of the most conservative estimates is that the generative AI market 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 windfall for companies at the forefront of this technology. However, many smaller companies have been reluctant to invest in new and emerging technology until the economy has stabilized, and the current mixed data has done little to provide that assurance.
Still, the future looks bright for our Magnificent Seven companies:
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Amazon and Alphabet are two of the ‘big three’ cloud infrastructure providers and as such are well positioned to deliver AI services to their cloud customers and reap the financial rewards.
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Meta Platforms has collected vast amounts of data from billions of users on its social media platforms to develop its Large Language Model Meta AI (LLaMA). The major cloud providers pay to offer this data on their platforms.
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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 advances in AI.
Finally, there’s the issue of valuation to consider, and not all Magnificent Seven stocks are created equal. Alphabet and Meta Platforms currently sell for 20 times and 24 times forward earnings, extremely attractive multiples, especially given the opportunity. Amazon stock sells 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.
But if Tesla is the first to crack the code on self-driving cars, its current valuation could eventually become meaningless.
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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, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Danny Vena has positions at Alphabet, Amazon, Meta Platforms and Tesla. The Motley Fool has positions at and recommends Alphabet, Amazon, Meta Platforms and Tesla. The Motley Fool has a disclosure policy.
Why Meta Platforms, Amazon, Alphabet and Other “Magnificent Seven” Stocks Dropped Friday was originally published by The Motley Fool
