(Bloomberg) -- Last week, DeepSeek’s emergence as an AI threat wiped half a trillion dollars of value off Nvidia Corp. Last night, Alphabet Inc.’s disappointing earnings sparked questions about its capital expenditures and put its stock on pace for the worst drop in more than a year.

The jolts reflect a deeper concern about a key narrative that has underpinned much of Big Tech’s rally for more than two years, and thereby the US market’s strength: is all the AI spending going to pay off? 

Five of the so-called Magnificent Seven firms have announced results so far in this period, while Amazon.com Inc. is due on Thursday and Nvidia is expected later in the month. Google parent Alphabet Inc., the latest to report, disappointed after its cloud unit, considered one of the clearest indicators of the AI boom, missed expectations in the fourth quarter.

Its shares fell 7.1% in premarket trading, weighing down Nasdaq 100 futures, which slipped 0.8% at 7:31 a.m. in New York.

The Magnificent Seven have driven the S&P 500’s earnings expansion and equity returns, with the group comprising about one-third of the benchmark’s weight. They’ve made up more than half of the index’s gains over the past two years, but their profit growth is decelerating just as their spending rises. 

The concerns raise a threat to their lofty valuations, given the group trades at a 40% premium to the broader S&P 500 based on forward price-to-earnings ratios. That spread has already been ebbing, falling from a peak of 70% back in 2023.

Year-over-year earnings growth for the biggest companies peaked in late 2023 and is expected to slow for a fifth consecutive quarter, according to data compiled by Bloomberg Intelligence. 

“The contrast between the CapEx and cash flow growth of the Magnificent Seven and the rest of the S&P 500 is quite remarkable,” wrote Andrew Lapthorne, Global Head of Quantitative Research at Societe Generale SA. 

The largest seven companies grew capital spending by 40% year-on-year in 2024, compared to growth of just 3.5% for the rest of the S&P 500, according to Lapthorne. On Wednesday, Alphabet said it expects $75 billion in 2025 capital expenditures, far exceeding the $57.9 billion that analysts expected. 

Trade tensions, geopolitical concerns and the sudden emergence of DeepSeek last week add to the pressure for the group. Meanwhile, investors will look for signs of stronger profit growth among the rest of the US benchmark. 

Year-over-year earnings growth is declining “dramatically” for Magnificent Seven stocks while the trajectory improves for rest of the S&P 500, said Kristian Heugh, manager of Morgan Stanley’s Global Opportunity Fund.

While exposure to the Magnificent Seven group was important for fund managers trying to keep pace with benchmarks in recent years, it won’t necessarily be the case going forward.

“While they are clearly at a high market cap, that may not be where the alpha is getting generated,” Heugh said. 

--With assistance from Henry Ren, Jeran Wittenstein and Subrat Patnaik.

(Updates with Alphabet shares in premarket trading in fourth paragraph.)

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