(Bloomberg) — A disappointing start to the earnings season for large-cap stocks has forced Wall Street to face reality and raised concerns that the artificial intelligence craze that has powered the bull market may be overblown.
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The world’s biggest tech companies dragged the S&P 500 down 2%, putting the U.S. benchmark on track for its worst selloff since December 2022. Losses were more pronounced in the Nasdaq 100, which plunged more than 3%. Alphabet Inc. fell 5% after it poured more resources into outpacing rivals in AI, spending that was higher than analysts had expected. Tesla Inc. shares tumbled 11% after a profit miss and delays in its robotaxi.
“Investors are finally waking up to AI spending and realizing that it is now more of a cost than a revenue generator,” said Peter Boockvar of The Boock Report.
Wednesday’s session was another lesson in the “concentration risk” that bears see in the market, with gains disproportionately owed to a small number of large winners. For the fourth straight session – and the 10th time in 11 days – smaller companies outperformed larger ones, evidence that investor appetite has shifted away from the giant tech companies that have come to dominate the benchmark indexes.
Goldman Sachs’ Top Stock Analyst Is Waiting for the AI Bubble to Burst
The Treasury yield curve has steepened as bets are being made that the Fed is likely to cut rates. Former New York Fed President William Dudley has argued for lower borrowing costs, which he says will likely happen at next week’s meeting. To many analysts, the move is concerning because it shows officials are rushing to avoid a recession.
The loonie fell slightly as the Bank of Canada cut rates, with the move focusing on “downside risks.” The yen hit its highest level since May as carry trades unwind.
Hargreaves Lansdown’s Steve Clayton says this year could be the start of a “So-So Seven” story in the markets, noting that the performance of Tesla and Alphabet alone won’t be enough to keep the momentum going.
“The market is underwhelmed by the start of earnings season for big tech stocks,” said Kathleen Brooks, research director at XTB. “A lot was riding on these results, and we don’t think they provide a clear answer to the question of AI’s effectiveness and earnings potential right now.”
After leading the stock rally for most of 2024, Big Tech has hit a wall. Traders have been moving out of big names and into the laggards of the market, spurred by bets on Fed rate cuts and concerns that AI hype still has to pay off.
“The problem with tech is not only that the returns aren’t perfect, but the group is still caught up in the violent rotation trade that started with the June CPI,” said Adam Crisafulli of Vital Knowledge. “Many thought the anti-tech rotation was temporary, and the fact that it’s sustainable is adding to the anxiety in this group and fueling additional selling pressure.”
The selloff in these stocks has revitalized some valuations. Only about half of the seven stocks are trading at a premium to their five-year average.
This is an area where you can argue for a dip, but earnings season is only just beginning. Apple Inc., Microsoft Corp., Amazon.com Inc. and Meta Platforms Inc. are all scheduled to report next week.
But when it comes to quarterly results, the concerns aren’t entirely technology-related. Overall, the second-quarter earnings season has started off weaker than usual.
Among S&P 500 companies that reported earnings, earnings beat analyst estimates by the narrowest margin since late 2022, and the revenue surprise was the worst in at least two years, according to data compiled by Bloomberg.
“We still see increased volatility in the second half of 2024, with a 10%-15% correction likely in benchmarks like the S&P 500 and Nasdaq 100,” said Dan Wantrobski of Janney Montgomery Scott. “Our research does not point to a secular/structural slowdown at this time, but rather a pause in a re-expansionary expansion cycle that began several years ago.”
According to Jose Torres of Interactive Brokers, the correction isn’t over yet.
Despite the recent selloff, the S&P 500 is still trading at nearly 22 times earnings, despite quarterly results that have been largely unimpressive for investors. Plus, the benchmark is up about 15% since the start of the year, which is impressive considering it hasn’t even been August yet.
“Yesterday we wrote that we would see a 10% to 15% correction this quarter, which is historically the worst period of the year,” Torres said. “This quarter has valuation concerns, along with upfront earnings, irrational exuberance, high earnings estimates, and the presidential election.”
As soon as the results were released, key technical indicators for the U.S. stock market moved close to historic extremes, a key indicator that has signaled sell-offs in the past.
Known as the “200-DMA,” this indicator stands for the 200-day moving average and measures how the S&P 500 is performing relative to a longer-term measure. At one point last week, the benchmark was trading as much as 15% higher, according to data compiled by Bloomberg.
This doesn’t necessarily mean the market will crash, but it’s a warning sign for investors concerned about high technology valuations and concentration risks.
The recent plunge in U.S. stocks is sending a warning to trend-following funds: Sell U.S. stocks regardless of market direction.
Both the Nasdaq 100 and S&P 500 benchmarks have breached thresholds that trigger sell signals for commodity trading advisors (CTAs), according to trading desk models from Goldman Sachs Group Inc.
According to the bank’s trading desk analysis, if stocks continue to fall, rule-based traders could liquidate $32.9 billion in global stocks, with $7.9 billion flowing out of U.S. markets. Even if the market reverses course, CTAs are still prepared to sell $902 million in U.S. stocks.
Company Highlights:
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Texas Instruments Inc. provided a sales outlook that signals an end to inventory glut, reassuring investors that a recovery is underway in a key market for the company’s chips.
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AT&T Inc. added far more wireless subscribers than Wall Street expected in the second quarter, as fewer customers canceled their subscriptions and more customers added wireless service to their broadband plans.
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Visa Inc. reported quarterly revenue that missed Wall Street estimates, a rare occurrence for the world’s largest payments network.
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Pfizer Inc.’s gene therapy for a severe bleeding disorder has met its targets in a pivotal late-stage trial, paving the way for the company to enter what has proven to be a challenging market for pharmaceutical companies.
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Deutsche Bank said it would likely not carry out a second share buyback this year after posting its first quarterly loss in four years.
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Kering Group has warned that profits will plunge in the second half of the year as demand for luxury goods cools and recovery efforts at its biggest brand, Gucci, continue to falter.
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Renault SA reported record first-half profitability, helped by falling raw material prices and strong demand for high-end sport utility vehicles such as the Austral and Espace.
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Blackstone Mortgage Trust Inc., which provides financing for commercial real estate, cut its dividend by 24% as defaults rise and borrowers struggle to make payments or refinance their loans.
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CrowdStrike Holdings Inc., the cybersecurity firm at the center of a massive global IT service outage, said last week’s crash occurred when a bug in its safety mechanisms caused incorrect data to be sent to customers via a faulty update.
Key events this week:
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German IFO corporate climate, Thursday
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U.S. GDP, new jobless claims, durable goods, Thursday
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US Personal Income, PCE, Consumer Sentiment, Friday
Some of the key market moves:
stock
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The S&P 500 was down 2% as of 2:57 p.m. New York time.
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The Nasdaq 100 fell 3.3%.
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The Dow Jones Industrial Average fell 1%.
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The MSCI World Index fell 1.6%.
call
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The Bloomberg Dollar Spot Index was little changed.
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The euro fell 0.1% to $1.0838.
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The British pound was little changed at $1.2902.
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The Japanese yen rose 1 percent to 154.02 per dollar.
Cryptocurrency
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Bitcoin was little changed at $65,890.93.
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Ether fell 3.2% to $3,373.72.
bond
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The 10-year Treasury yield rose 3 basis points to 4.28%.
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German 10-year yields were little changed at 2.44%.
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UK 10-year yields rose 3 basis points to 4.16%.
Goods
This article was created with the assistance of Bloomberg Automation.
–With assistance from Julien Pontus, Aya Wagazma, Lu Wang, Jessica Mentone, Felice Maranz, Sagarika Jaisinghani, Joel Leon, Natalia Kniazevic, Tatiana Dari, and Alex Nicholson.
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