Deutsche Bank’s recent analysis highlights a striking divergence within technology: while broad corners of the tech sector - and software names in particular - have experienced heavy selling, the collection of the largest tech companies commonly referred to as the Magnificent Seven has remained mostly intact and has helped prop up major market benchmarks.
The market reallocation away from certain technology assets accelerated this week amid growing questions about valuations and the scale of spending being directed at artificial intelligence. Software stocks have taken particularly large losses, with notable drawdowns over recent weeks that investors have attributed to the potential for AI-enabled products to displace cloud-based legacy software used by businesses.
Macquarie’s Thierry Wizman offered a concise explanation for the recent bout of selling pressure: "While several months in the making, the panic in that sector yesterday seems to have been triggered by news that foundational AI companies could offer cheaper alternatives to the cloud-based legacy software programs running businesses, and that the latter would be made obsolete in a replacement cycle. If so, it also means that the productivity-enhancing benefits of AI could come sooner," he said.
Deutsche Bank observes that the market narrative has shifted from a broad-based optimism that AI would lift every technology stock to a more selective environment in which winners and losers are being defined. "Over the last few months, the market has clearly shifted from the 'every tech stock is a winner' mindset to something far more brutal: a true winners and losers landscape," said Jim Reid, who shared a chart showing sizeable declines for many software companies from their 52-week highs.
Reid’s chart calls out several software-related names with steep pullbacks: Duolingo (NASDAQ:DUOL) has fallen 78% from its recent 52-week high, PayPal (NASDAQ:PYPL) is down 55%, and ServiceNow (NYSE:NOW) has slid 53% from its own peak. Those falls represent some of the sharpest drawdowns on the equipment of the chart and underscore where investor pain has concentrated.
By contrast, Reid’s analysis finds that the Magnificent Seven as a group has only retraced roughly 1% from its most recent peak, even though six of the seven members are individually lower in the range of about -5% to -25% from their highs. The single standout in recent months has been Alphabet (NASDAQ:GOOGL). "The outlier, Alphabet, is up nearly +25% over the last three months and roughly +75% over the last six. That +75% translates into around $1.7 trillion in market value," Reid observed.
The Magnificent Seven group includes the following companies: Tesla (NASDAQ:TSLA), NVIDIA (NASDAQ:NVDA), Microsoft (NASDAQ:MSFT), Meta Platforms (NASDAQ:META), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), and Alphabet (NASDAQ:GOOGL). Because Alphabet’s gains have been so large in market-value terms, they have effectively offset a substantial portion of losses among many smaller-capped technology and software firms.
Reid put that effect in clearer market-context terms: "To put that in perspective: most of the other companies on the chart - those outside the Mag 7 - have market caps in mostly the tens of billions with a few in the hundreds. Alphabet’s gain alone over six months has therefore offset a significant portion of the broader group’s losses." The concentration of gains in a single large-cap name helps explain why the S&P 500 has remained near record highs even as selling pressure has emerged elsewhere, accompanied by a notable rotation into defensive sectors.
Deutsche Bank cautioned that the relative resilience of the main market index depends heavily on the Mag 7 avoiding deeper disruption. "For the main index, though, we should hope that more of the Mag 7 don’t find themselves disrupted and joining the losers column in this rapidly evolving technological cycle. That’s when it would properly spill over into macro," Reid added.
The current regime therefore reflects a bifurcated market: concentrated gains among a handful of very large-cap technology names juxtaposed with sharp retrenchments in several software equities. How that balance evolves will determine whether stock-market leadership remains concentrated or whether broader indices begin to reflect more of the losses that have already hit parts of the tech sector.
Data points and names referenced in this report:
- Software drawdowns highlighted: Duolingo (NASDAQ:DUOL) -78% from 52-week high; PayPal (NASDAQ:PYPL) -55%; ServiceNow (NYSE:NOW) -53%.
- Magnificent Seven collective change: roughly -1% from most recent peak, with six members down between -5% and -25% and Alphabet (NASDAQ:GOOGL) rising markedly.
- Alphabet’s recent moves: approximately +25% over three months and about +75% over six months, equating to an estimated $1.7 trillion increase in market value over that period.