Why Major Tech Stocks, Including Meta and Amazon, Dropped on Friday

Since early last year, the stock market has been largely driven by excitement around artificial intelligence (AI). Many of the world's biggest companies have poured significant resources into AI, hoping to benefit from its potential growth. However, there are growing concerns about the state of the overall economy, which could influence the stock market's short-term performance.

On Friday, shares of Meta Platforms (NASDAQ: META) dropped 2.8%, Amazon (NASDAQ: AMZN) fell 3.3%, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) declined 3.6%, and Tesla (NASDAQ: TSLA) saw a 6.8% dip by mid-afternoon.

It's important to note that no specific news from these companies caused the sell-off. Instead, the decline seems to be linked to a report suggesting that the broader economy is slowing down more quickly than expected. Investors are reacting to this broader economic uncertainty, affecting even the "Magnificent Seven" tech giants.

How the Economy is Impacting Stock Performance

The U.S. Bureau of Labor Statistics released its monthly jobs report, which showed that nonfarm payrolls increased by 142,000 in August, up from 89,000 in July. While this sounds positive, it fell short of economists' predictions of 161,000. The unemployment rate held steady at 4.2%, in line with expectations.

At first glance, these figures might seem like good news. A slowdown in job growth could signal that the economy is cooling down, increasing the likelihood that the Federal Reserve will lower interest rates soon. So far, the Fed has been cautious about cutting rates until it is confident that inflation is under control and the economy is cooling off.

The slowing job growth gives the Fed room to consider reducing rates, but there are details in the report that raised concerns among investors. One of the more worrying signs is how quickly the labor market is losing strength. Revised figures for June and July showed 86,000 fewer jobs were created than initially reported.

The Fed has been trying to tame inflation without causing a recession, a strategy known as a "soft landing." While it looked like the Fed was achieving this goal, the updated job numbers suggest the economy is cooling faster than expected, which raises the risk—however slight—that a recession might still happen.

Just a few months ago, in July, major market indexes were hitting record highs, but now, with the jobs data showing signs of weakness, some investors are taking profits as a precaution.

The AI Opportunity for Meta, Amazon, Alphabet, and Tesla

So, how do Meta, Amazon, Alphabet, and Tesla fit into this? The key connection between these "Magnificent Seven" companies is their potential to dominate the AI landscape. Each has invested heavily in AI technology, and the reasons are clear.

Estimates for the value of the generative AI market range widely, but according to McKinsey & Company, it could be worth between $2.6 trillion and $4.4 trillion per year. This represents a massive opportunity for businesses at the forefront of AI. However, some smaller companies have been hesitant to invest in emerging tech until economic conditions improve, and today’s mixed economic data did little to provide clarity.

Despite this uncertainty, the future looks promising for the Magnificent Seven:

Amazon and Alphabet are two of the top three providers of cloud infrastructure, positioning them to offer AI services through their cloud platforms, which could translate into significant profits.

Meta Platforms, meanwhile, has gathered vast amounts of data from its billions of social media users to develop its Large Language Model Meta AI (LLaMA). This AI technology is now being offered on major cloud platforms, further expanding its reach.

Tesla has long been working on its Full Self-Driving (FSD) technology, powered by AI. The company recently announced plans to launch FSD in Europe and China as soon as next year, thanks to AI advancements.

Finally, when considering the value of these stocks, it's important to note that not all are equal. Alphabet and Meta Platforms are trading at relatively reasonable multiples, 20 times and 24 times forward earnings, respectively, making them attractive investments. Amazon is trading at less than 3 times sales, which is also appealing. Tesla, on the other hand, remains expensive at 90 times forward earnings and 7 times sales, making it a riskier option.

However, if Tesla successfully perfects self-driving technology, its current valuation may become a moot point, offering significant upside for investors.

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