Mag 7 loses $2.3 trillion in June as AI spending fears mount

The CNBC Magnificent Seven Index fell 10% in June, erasing $2.3 trillion from the combined value of Microsoft, Nvidia, Alphabet, Apple, Meta, Tesla and Amazon.

"We are going through another gut check for the tech trade as tech investors await a very important second-quarter earnings season in July to further validate the AI revolution buildout," said Dan Ives, managing director at Wedbush Securities. "In the meantime, jitters will continue as worries around the costs of this once-in-a-generation tech buildout hit its next gear of growth."

Microsoft dropped 20% in June, while Nvidia fell about 13%. Apple and Amazon each declined roughly 8%. The selloff was concentrated in mega-cap tech — the average stock in the S&P 500 gained 1.6% last week, signaling limited contagion. Semiconductor stocks held up better, with the Philadelphia Semiconductor Index rising about 6% in June and more than 90% year-to-date. Micron Technology surged 13% in after-hours trading June 24 after reporting adjusted earnings of $25.11 per share on revenue of $41.46 billion, both topping analyst estimates, as an industrywide memory shortage drove margins to 84.6%.

The selloff reflects a fundamental shift in how investors assess the Mag 7. These companies — particularly Amazon, Microsoft, Alphabet and Meta — are collectively spending hundreds of billions of dollars on chips and data centers, transforming from asset-light cash generators into balance-sheet-intensive infrastructure builders. "The market is trying to understand the new narrative around the Mag 7 because they went from asset-light companies that produced a lot of free cash flow, now to ones that are more balance sheet intensive," said Tom Lee, head of research at Fundstrat Global Advisors. The second-quarter earnings season, which begins in July, will be the first major test of whether that spending is translating into revenue growth.

Defensive rotation accelerates as rate fears resurface

The selloff in growth stocks coincided with a rotation into defensive sectors. Healthcare stocks climbed more than 7% for the week ending June 26, followed by real estate and utilities, each up about 3.5%. Consumer staples gained 1.6%. On the losing side, the communications sector dropped 5.5% and technology fell 5.2%. Alphabet and Meta, down 7% and 5% respectively for the week, weighed heavily on the communications sector.

The rotation was driven in part by shifting expectations for Federal Reserve policy. The Personal Consumption Expenditures price index for May, the Fed's preferred inflation gauge, is expected to show inflation running at 4.1% year-over-year, the highest since 2023. Core PCE, which excludes food and energy, is forecast at 3.4%. New Fed Chair Kevin Warsh used his first Federal Open Market Committee meeting to signal determination to bring inflation back to the 2% target, leading traders to price in at least one interest rate hike by year-end, according to CME Group's FedWatch tool.

Oil retreat offers relief but inflation hangover lingers

Oil prices have fallen back to pre-war levels, with West Texas Intermediate crude trading near $70 a barrel after President Donald Trump said Iran had assured the US there would be no tolls on ships passing through the Strait of Hormuz. WTI is down about 40% from its wartime closing high of about $113. The 10-year Treasury yield ticked down to 4.38% from 4.39% after the PCE reading matched expectations. The US dollar index was recently at 101.30, down 0.1%.

Despite the retreat in energy costs, the inflation surge from earlier this year has left a mark. The Cleveland Fed estimates consumer inflation is running close to 4%, and the elevated rate has made it more likely the Fed will raise short-term interest rates than lower them this year — a headwind for risk assets including equities.

AI spending cycle faces its first real test

The central unknown for markets is whether the massive capital expenditure cycle in AI will deliver attractive returns. Corporate adoption of AI continues to climb, but the spending required to build infrastructure has left investors questioning the payoff. The potential delay of OpenAI's initial public offering, which The New York Times reported may slip to next year partly because of volatility in newly public SpaceX shares, added to the negative tech sentiment late last week.

Chip stocks remain a bright spot. UBS analysts said bottlenecks in the AI supply chain show no signs of abating, and the bank expects cloud revenue to accelerate at major platforms through the rest of this year. "These underscore the solid fundamentals of the AI growth story that we believe should remain a key driver of the broader market," UBS said.

At 21.4 times estimated 2026 earnings and 18.5 times 2027 estimates, stocks are not cheap. Continued above-average earnings growth — the technology sector is forecast to post 63.2% year-over-year earnings growth in the second quarter — could offset elevated valuations, but much depends on whether the AI spending cycle delivers the returns investors are banking on.

This article is for informational purposes only and does not constitute investment advice.