Wall Street have fallen, with the tech-heavy Nasdaq leading declines after lacklustre quarterly results from Tesla and Alphabet raised questions about the sustainability of the big tech and AI-led 2024 equity rally.
Tesla slumped 11.2 per cent after the EV maker reported its lowest profit margin in more than five years and missed second-quarter earnings estimates.
Google parent Alphabet shed 4.1 per cent despite posting a second-quarter earnings beat, as investors focused on a slowdown in advertising growth and the company flagged high capital expenses for the year.
Alphabet’s losses underscored the high earnings bar for the so-called “Magnificent Seven,” a set of megacap tech stocks that have notched double- and triple-digit percentage gains so far in 2024, riding on the optimism around AI adoption and expectations of an early start to the Federal Reserve’s interest-rate cuts.
“I can’t help thinking (that) if the tech sector does sneeze, the whole market could catch it,” said David Morrison, senior market analyst at TradeNation.
Other megacaps also fell, with Microsoft, Amazon.com, Meta Platforms and Nvidia down between 0.8 per cent and 2.9 per cent.
Wary of the high valuation of these companies, market participants started shifting to underperforming sectors in mid-July.
Morrison sounded a note of caution, saying broad megacap declines could drag the entire market down.
“If money comes out of the tech sector, it’ll come out quite dramatically. I don’t think the first reaction of those investors is going to be to immediately redeploy those funds into mid- and small-cap stocks,” Morrison said.
The small-cap Russell 2000 fell 0.3 per cent after a 1.0 per cent gain in the previous session while Tesla and Alphabet’s results dragged the Communication Services and Consumer Discretionary sector indexes down more than 2.0 per cent each.
In economic data, S&P Global’s flash US Composite PMI Output Index showed business activity climbed to a 27-month high in July.
Friday’s release of the personal consumption expenditures numbers, the US Federal Reserve’s preferred inflation measure, will be the week’s most closely watched economic data.
Traders largely expect the Fed to cut rates by 25 basis points by September and anticipate two rate cuts this year, according to LSEG data.
In early trading on Wednesday, the Dow Jones Industrial Average was down 203.99 points, or 0.51 per cent, at 40,154.10, the S&P 500 was down 64.25 points, or 1.16 per cent, at 5,491.49, and the Nasdaq Composite was down 328.36 points, or 1.82 per cent, at 17,669.00.
In other earnings, AT&T gained 3.6 per cent after beating forecasts for wireless subscriber additions.
Visa was the biggest Dow decliner, dropping 3.9 per cent after its third-quarter revenue growth fell short of expectations.
Solar inverter maker Enphase Energy jumped 7.4 per cent after beating estimates for second-quarter operating profit, while General Dynamics fell 5.1 per cent after delivering fewer business jets than expected in the second quarter.
Rivian Automotive lost 6.3 per cent.
The EV maker will go on trial over allegations it encouraged its employees who defected from Tesla to steal trade secrets.
Declining issues outnumbered advancers for a 1.31-to-1 ratio on the NYSE, and for a 1.48-to-1 ratio on the Nasdaq.
The S&P index recorded nine new 52-week highs and three new lows while the Nasdaq recorded 58 new highs and 33 new lows.