Magnificent Seven Stocks Drop 13% Since May Peak – Is it Time to Buy the Dip?

TLDR

• Magnificent Seven stocks have dropped more than 13% since their mid-May peak, far worse than the S&P 500’s roughly 2% decline.
• Tesla and Microsoft are down over 32% from their 52-week highs, the worst performers in the group.
• Big Tech AI capital spending is projected to jump 70% to over $700 billion this year, squeezing free cash flow.
• Investors are watching for a possible Fed rate hike later this year, which could raise the cost of financing AI projects.
• Despite the slump, Alphabet, Meta, and Microsoft posted strong recent quarterly revenue and profit growth.

The Magnificent Seven stocks are having a rough stretch. Since hitting their peak in mid-May, the group has fallen more than 13%, according to 22V Research strategist Jeff Jacobson.

That decline stands out next to the broader market. The Invesco QQQ Trust and the S&P 500 are each down only about 2% over the same period.

How Far Each Stock Has Fallen

Looking at the drop from 52-week highs paints a clearer picture. Amazon is down 11%, while Apple has fallen 11.7%.

Amazon.com, Inc., AMZN

Alphabet has slipped 12.3%, and Meta is down 14.4%. Nvidia has dropped 18.5% from its high point.

Tesla and Microsoft are the hardest hit. Tesla has fallen 32.6%, while Microsoft is down 32.9% from its 52-week high.

Why Investors Are Losing Patience

The main reason behind the slide is spending. Big Tech companies are pouring money into AI infrastructure, and Wall Street is growing impatient.

AI capital expenditures are projected to grow 70% this year, pushing past $700 billion. That spending is on data centers and high-end computer chips.

This heavy spending has cut into how much cash these companies generate. The Magnificent Seven’s combined 12-month forward free cash flow is expected to fall sharply from its 2024 peak.

There are also concerns about a possible Federal Reserve rate hike later this year. A rate hike would make it more expensive to finance AI projects, adding another layer of pressure on these stocks.

Wedbush analyst Dan Ives said investors are bracing for a difficult few weeks. He pointed to the upcoming second-quarter earnings season in July as a key test for the AI buildout story.

Ives said jitters will likely continue as the costs of this technology buildout grow. Investors want proof that the spending will eventually pay off.

Right now, the Magnificent Seven are being called “show me” stories. That means investors want to see clear evidence that all the AI investment will turn into profit.

It’s unlikely that proof will arrive in the second quarter earnings reports. That means the pressure on these stocks could continue for a while longer.

Some Names Are Still Showing Strength

Not every story here is negative. Alphabet’s search revenue grew 19% year over year to $60.4 billion in its most recent quarter, driven by AI integration.

Alphabet’s cloud business also grew fast. Cloud revenue rose 63% year over year to $20 billion, with operating income more than tripling to $6.6 billion.

Meta reported similar momentum. Its first-quarter revenue rose 33% year over year to $56.3 billion, while net income jumped 61% to $26.8 billion.

Microsoft posted record revenue of $82.9 billion last quarter, up 18.3% year over year. Its cloud division, Azure, grew 40% as companies sought AI computing power.

Microsoft’s net income reached $32 billion in its latest quarter, a 23% increase from the year before. The company maintained a 46% operating margin despite heavy data center spending.

These results show some companies are translating AI spending into earnings growth. Still, broader investor concerns about the pace of spending and potential rate hikes remain the dominant theme heading into earnings season.

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