Feb. 23 Correlation Break Pushes Big Tech Forward P/E Below 25x
Correlation between the Magnificent Seven and the S&P 500 turned negative on Feb. 23, a rare divergence that pushed the group’s forward P/E from nearly 33x in October to below 25x. Heavy AI capex by Alphabet and peers will cut combined free cash flow to about $94 billion in 2026.
1. Correlation Breakdown and Valuation Impact
On February 23, the correlation between the Magnificent Seven index and the S&P 500 turned negative, marking the sharpest divergence since 2016 and driving the group’s forward P/E multiple down from nearly 33x in October to below 25x.
2. Heavy AI Capital Expenditure Reduces Free Cash Flow
Alphabet and its tech peers are forecast to spend heavily on AI infrastructure, cutting their combined free cash flow to approximately $94 billion in 2026, down sharply from $230 billion in 2024.
3. Nvidia’s Plateau Dampens Tech Rally
Despite projecting $1 trillion in data center sales by 2027, Nvidia’s shares have traded sideways for seven months and declined 4.1% in recent weeks, highlighting investor concerns over peaking growth and AI spending.
4. Potential for Outperformance
With valuations at multi-year lows and positioning washed out, Alphabet and other Big Tech names may be well placed to reassert market leadership if AI returns to the forefront of investor interest.