The shift has become visible in recent weeks. According to deVere Group, nearly $2.3 trillion has been wiped off the combined market value of the Magnificent Seven during June.
The correction comes after a strong run that was driven by expectations that AI would transform the technology industry and create a new wave of corporate profits. That optimism is now giving way to a more cautious approach as investors wait for evidence that the spending is translating into higher earnings.
The upcoming June-quarter earnings season is expected to be an important test for the sector.
Nigel Green, chief executive of deVere Group, said markets are entering a more demanding phase for AI investments.
The Pakistan connection that helped Donald Trump make $1.4 billion crypto jackpot”The easy phase of the AI investment story is over. Investors were willing to support massive spending when expectations were high and stock prices kept rising. Now they want proof that these investments will deliver returns,” he said.The biggest concern is the scale of spending. Microsoft, Amazon, Alphabet and Meta are investing hundreds of billions of dollars in AI infrastructure, including data centres, advanced chips and cloud computing capacity. Instead of slowing, these investments continue to rise.Reports suggest that spending by the largest technology companies on AI infrastructure could exceed 700 billion this year, around 70% higher than last year. This has started affecting free cash flow, as companies spend more cash on expansion instead of generating higher profits.
An Apollo Global Management presentation released in June points to the same trend. The report says investors are beginning to rotate away from companies with heavy capital expenditure towards businesses with stronger free cash flow. It also shows that free cash flow among hyperscalers has started declining while capital expenditure as a share of operating cash flow continues to rise.
The Magnificent Seven index has fallen more than 13% from its recent peak, while the broader S&P 500 and Nasdaq have seen much smaller declines. Investors who treated the seven companies as one trade are now beginning to differentiate between them based on business models, profitability and AI monetisation.
The pressure is not uniform across all seven stocks. Amazon, Microsoft, Alphabet and Meta are facing questions over whether their massive AI infrastructure spending will eventually produce enough revenue. Apple is dealing with rising memory and storage costs, which recently forced the company to increase prices on several products. Nvidia, despite remaining the biggest AI beneficiary so far, is also facing increasing competition in the semiconductor market.
At the same time, investors are shifting towards companies that supply the AI ecosystem rather than those building it. Chipmakers, memory manufacturers and computing infrastructure providers have continued to perform well even as the technology giants have struggled.
Green believes this reflects a broader change in investor thinking. “The companies supplying chips, memory and computing power are performing much better than those spending hundreds of billions building AI systems. Owning an AI strategy and owning the economics of AI are two different things,” he said.
The shift also reflects concerns over financing. With interest rates expected to remain elevated, borrowing to fund AI projects becomes more expensive. Several large technology companies are increasingly relying on debt markets despite holding significant cash reserves.
Reports suggest investors are no longer rewarding AI announcements alone. Instead, they want to see measurable revenue growth, expanding margins and improving cash generation.
Macquarie said in a recent strategy note that AI adoption continues to grow much faster than previous technology cycles. Annualised AI revenues are already estimated at around $175 billion, while investment in AI is expected to reach about $850 billion this year. The brokerage noted that adoption rates remain strong even though concerns over valuation and spending have increased.
Apollo also does not view the recent correction as the end of the AI cycle. Instead, it argues that markets are becoming more selective and placing greater emphasis on profitability rather than growth alone.
Green believes the biggest change will be in how investors view the Magnificent Seven. He expects the market to stop treating them as a single group and instead reward only those companies that successfully convert AI investments into sustained earnings growth.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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