Subpar performance has become the spark that ignites the backlash against high expectations for US tech stocks.

US stocks closed sharply lower on Wednesday, with large tech stocks bleeding heavily.

At the close on Wednesday, the Dow Jones fell by 1.25%, while the tech-heavy Nasdaq plummeted by over 3.64%, marking the largest single-day drop since December 2022.

The tech sector's "Seven Sisters" suffered a rout, with Tesla (TSLA.US) plunging 12.33%, Nvidia (NVDA.US) falling 6.8%, and Alphabet's Class C (GOOG.US) dropping over 5%.

Overnight, the combined market value of the "Seven Sisters" evaporated by more than $760 billion!

Are market expectations for tech stocks too high?

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Amid the AI boom, the "Seven Sisters" of tech stocks have seen a significant increase in their ability to attract capital in the capital market, forging the Nasdaq's brilliant performance this year.

One major cause of this deep adjustment in US stocks is that the performance of some tech stocks did not meet expectations, shattering the market's illusions.

Financial reports show that Tesla's delivery volume in the second quarter of this year decreased by 4.76% year-on-year, underperforming expectations, with automotive sales revenue falling by 9.25% year-on-year, a drop higher than the delivery volume.

In addition, the launch of Tesla's self-driving taxi service has been delayed until October 10th, intensifying market concerns.

Furthermore, Google's YouTube ad revenue in the second quarter was $8.66 billion, significantly below expectations, leading investors to worry whether Google's massive investment in AI will truly yield returns.

This widespread plunge in tech stocks has caught investors off guard, igniting panic in the market.

In the coming weeks, large tech companies like Apple, Microsoft, Amazon, and Meta will announce their earnings one after another.

Whether their report cards can soothe investors' panic will likely affect the trend of the US stock market.

A recent report released by service consulting firms Dealroom and Flow Partners shows that the US "Seven Sisters" invest as much as $400 billion annually in AI and cloud infrastructure, covering fields from AI chips, large models, to humanoid robots, autonomous driving, AI healthcare, and more.

According to statistics from FactSet, in the first quarter of this year, the total capital expenditure of Amazon, Google, Microsoft, and Meta set a new high of $44 billion.

Such generous investment by tech giants aims to seize the initiative in this AI cycle.

The capital market is also full of expectations, pushing the growth expectations of tech stocks to new heights.

However, the market's high expectations can be easily shattered by reality.

Before the recent pullback in US tech stocks, several international investment banks such as Goldman Sachs and Citigroup had warned that the risks in US stocks are getting higher and higher.

Société Générale even wrote: "The valuation of IT stocks is a time bomb."

Moreover, in the view of Goldman Sachs, the billions of dollars spent by companies in the AI field will not trigger the next economic revolution, and may not even match the benefits of smartphones and the internet.

Is it too cold at the top?

After OpenAI's ChatGPT was launched in November 2022, the capital market seemed to have found a gold mine, with the stock prices of AI companies represented by Nvidia and Microsoft continuing to rise, further pushing up market expectations and valuations.

At this critical moment when these tech giants face slowing profit growth, high valuations undoubtedly increase the risk of profitability.

Some analysts have pointed out that the price-to-earnings ratios of these companies are generally too high, and once affected by external shocks and black swan events, they will be greatly impacted.

Goldman Sachs stated that large-scale enterprises will eventually be required to prove that their investments will generate revenue and profits, and failure to meet these expectations will lead to a significant drop in valuations and stock prices.

The valuations of the three major US stock indices are also high, with Wind data showing that over the past decade, the average trailing twelve-month price-to-earnings ratios of the S&P 500, Nasdaq, and Dow Jones Industrial Average were 23.83 times, 37.39 times, and 21.82 times, respectively, but are now at 26.8 times, 42.2 times, and 28.6 times, respectively.

Goldman Sachs tactical strategist Scott Rubner warned that the S&P 500 has no choice but to fall next.

The US stock adjustment has just begun, and do not buy on dips.

In fact, since last week, the upward momentum of US tech giants has disappeared, and more and more people in the market have chosen to take profits, including many institutional large-scale cashing out.

And some institutions have already taken the lead in "pocketing the profits".

According to Wind data, in the second quarter of this year's 13F institutional holdings, many tech stocks, including the "Seven Sisters", have been reduced by institutions, and the number of institutions has also declined.

Among them, Nvidia's institutional shareholders decreased by 2684 to 1191, and institutional holdings decreased by 733 million shares.

Jim Covello, a Goldman Sachs analyst responsible for the technology industry, pointed out in a report, "Despite the high cost and investment, AI technology is still a long way from being truly useful at least for now.

Overbuilding something the world is not ready for usually ends badly."