The growth of the seven giants in the US stock market slows down, and the upward trend of the S&P 500 index may face obstacles

According to Zhitong Finance APP, last week, the emergence of DeepSeek as an artificial intelligence threat caused NVIDIA (NVDA.US) to lose $500 billion in market value. This morning, disappointing earnings from Alphabet (GOOGL.US) raised questions about its capital expenditures, leading to its stock price experiencing the largest drop in over a year. The repeated "setbacks" of the seven giants have also prompted a rethinking.

These fluctuations reflect deeper concerns about a key question that has supported the surge of large tech stocks for more than two years, and in turn, bolstered the strength of the U.S. stock market: Will all artificial intelligence spending yield returns?

So far, five of the seven giants have released their earnings reports, with Amazon (AMZN.US) set to announce its results after the market closes on Thursday, and NVIDIA expected to report later this month. Alphabet's cloud computing division is considered one of the clearest indicators of the artificial intelligence boom, but its fourth-quarter performance fell short of expectations.

As of the time of writing, the company's stock price dropped 7.5% in pre-market trading, dragging down the Nasdaq 100 index futures by 0.6%.

The "seven giants" have driven the earnings expansion and stock returns of the S&P 500 index, accounting for about one-third of the index's weight. Over the past two years, these companies have contributed more than half of the index's gains, but as their spending increases, their profit growth is also slowing.

These concerns pose a threat to their high valuations, as their stock prices are at a 40% premium to the S&P 500 index based on forward price-to-earnings ratios. This spread has fallen 70% from its peak in 2023.

According to data compiled by Bloomberg Intelligence, the year-on-year profit growth of large enterprises peaked at the end of 2023 and is expected to slow for the fifth consecutive quarter.

Andrew Lapthorne, global quantitative research head at Societe Generale SA, wrote: "The contrast between the capital expenditure and cash flow growth of the seven giants and other components of the S&P 500 index is quite significant."

According to Lapthorne's data, in 2024, the capital expenditure of the seven largest companies is expected to grow by 40% year-on-year, while other companies in the S&P 500 index will only grow by 3.5%. Alphabet has indicated that it expects capital expenditures to reach $75 billion in 2025, far exceeding analysts' expectations of $57.9 billion.

Trade tensions, geopolitical concerns, and the sudden emergence of DeepSeek last week have increased pressure on these tech giants. Meanwhile, investors will look for signs of stronger profit growth among other components of the U.S. benchmark index.

Kristian Heugh, a manager at Morgan Stanley's Global Opportunity Fund, stated that the year-on-year profit growth of the "seven giants" is "plummeting," while the profit growth trajectory of other components of the S&P 500 index has improved Although it is important for fund managers trying to keep up with the benchmark in recent years to hold stocks of the "Seven Giants," the situation may not be the same in the future.

Heugh stated, "While they are clearly at high market capitalization, this may not be the place where alpha is generated."