Why is this expert saying “we no longer see a bullish case” for these seven great stocks?

Some of the companies in Magnificent 7 are starting to look a little less impressive.

Rothschild & Co Redburn on Tuesday downgraded Amazon (AMZN) and Microsoft (MSFT) to a neutral rating from buy, a measure of cold water on supporters of the AI ​​rally — and on stocks that are very popular with Wall Street analysts. “We no longer see a bullish situation,” analyst Alex Hessel wrote. Microsoft and Amazon shares fell by 2.7% and 4.4%, respectively, on a down day for the markets.

The AI ​​rally, which pushed broad market indices to record levels, had already begun to slide. Between concerns about valuations, comparisons to the dot-com bubble, high-profile stock sales, and earnings reports showing capital investments whose returns investors now see as less certain, the enthusiasm has dissipated. Now, a troubling report on two major figures in the narrative AI world is expected just before Nvidia’s (NVDA) earnings, and is expected tomorrow.

The gist of the 61-page report is that developing generative AI costs more than generating revenue. Although the new technology is often compared to cloud computing in its early days, Heisel said the capital intensity needed to develop Gen-AI is roughly three times higher, which would require “materially higher prices” to make financial sense. At the same time, he argues that the impact of AI business on the growth of large cloud computing businesses – on which both Microsoft and Amazon rely heavily – has been overstated.

“There is no reliable path back to cloud 1.0 economics,” Hessel said. “However, the market is still pricing in this outcome, implying that the returns we believe are no longer achievable – and this imbalance supports our more cautious stance.”

Amazon’s AWS is better positioned than Microsoft’s Azure in terms of capturing value, the analyst said, but to be able to cast a more positive outlook on the pair, both would have to show evidence that they deliver higher growth over a long period of time and reduce construction costs.

Amazon and Microsoft’s downgrades come after years of the store maintaining an “above consensus bullish outlook” on them. The price targets for the shares are $250 and $500 respectively, not far from the levels where they closed on Tuesday.