Big tech stocks were expensive. Then the market turned on AI

"After the recent downturn, many of those tech behemoths are now trading at valuations rarely seen. Nvidia Corp. is priced at a little more than 21 times forward earnings, which is basically the same as the S&P 500 and down from its 10-year average of 35 times. Amazon.com Inc. shares are priced at 23 times forward earnings, half their average multiple over the past decade of 46."

"Big Tech stocks have been underperforming for months due to concerns about ballooning spending on artificial intelligence and a rotation into sectors that tend to do well in an expanding economy. An index of the so-called Magnificent Seven giants is down 6% since the end of October while the S&P 500 Index is basically flat."

"It's a natural outgrowth of companies like Amazon pumping ever-greater piles of cash into computing infrastructure to develop AI. There's been a complete repricing of the Mag 7 because they underwent a transformation from asset-light companies with massive cash flow to capital-intensive businesses."

The Magnificent Seven technology giants have experienced significant underperformance over recent months, declining 6% since October while the broader S&P 500 remains flat. This reversal follows years of exceptional outperformance where these companies tripled or quadrupled market returns. The shift stems from investor skepticism about massive capital expenditures on artificial intelligence infrastructure and a rotation toward sectors positioned to benefit from economic expansion. Major tech companies including Nvidia, Amazon, Alphabet, Apple, Meta, and Microsoft now trade at valuations rarely seen in the past decade, with many priced at multiples significantly below their historical averages. Nvidia trades at 21 times forward earnings versus its 10-year average of 35 times, while Amazon trades at 23 times earnings compared to its decade average of 46 times.

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