Wall Street got a reality check after a disappointing start of the megacap earnings season fueled concern the artificial-intelligence frenzy that has powered the bull market might be overblown.
The world's largest technology companies drove the S&P 500 toward its worst selloff since December 2022. Losses were more pronounced in the Nasdaq 100, which tumbled 3%.
Alphabet Inc. slid 5% after sinking more resources into its drive to outmatch rivals in AI, fueling spending higher than analysts expected. Tesla Inc.'s profit miss and the Robotaxi delay triggered an 11% plunge in the shares.
Investors are finally waking up to all that AI spend and realizing it is much more of an expense right now rather than a revenue generator," said Peter Boockvar at The Boock Report.
Wednesday's session was another lesson in the "concentration risk" bears see as latent in a market whose upside has owed disproportionately to a narrow cohort of massive gainers.
For a fourth straight session — and the 10th time in 11 days — the performance of smaller companies exceeded larger ones, evidence investor tastes have shifted from the megacap tech names that have come to dominate benchmark indexes.
Treasury two-year yields — more sensitive to policy moves — tumbled. Former New York Federal Reserve President William Dudley called for lower borrowing costs — preferably at next week's gathering. For many analysts, such a move would be worrisome as it would indicate officials rushing to avoid a recession.
The loonie edged lower as the Bank of Canada cut rates, with the move focused on "downside risks." The yen hit the highest since May amid an unwind in carry trades.
To Steve Clayton at Hargreaves Lansdown, this could be the year markets start talking about the "So-So Seven," noting that results from Tesla and Alphabet are not enough to maintain their momentum.
"The market is not impressed with the start of earnings season for the mega tech stocks," said Kathleen Brooks, research director at XTB. "There was a lot resting on these results and we don't think that they give clear answers to questions about the effectiveness and profit potential for AI right now."
After driving the rally in stocks for most of 2024, big tech slammed into a wall. Traders rotated from megacaps to lagging parts of the market, spurred by bets on Fed rate cuts and concern the AI hype still needs to pay off.
"Tech's problem isn't just that earnings are less than perfect, but the group is still caught up in the violent rotation trade that kicked off with the June CPI," said Vital Knowledge's Adam Crisafulli. "Many assumed the anti-tech rotation would be ephemeral and the fact it's proving durable is compounding anxiety toward the group and spurring additional selling pressure."
The drubbing in these stocks has seen some of the air come out of valuations. Out of the seven, only about half are still trading at a premium to their five-year average.
While that's something that could argue in favor of dip buying, the earnings season just getting started. Apple Inc., Microsoft Corp. Amazon.com Inc. and Meta Platforms Inc. are all due to report results next week.
