US stock indices on Wednesday recorded their worst day in more than 18 months after lacklustre overnight results from index heavyweights Tesla and Alphabet deepened a technology sector sell-off.
The blue-chip S&P 500 fell 2.3 per cent, its worst day since December 2022, while the tech-heavy Nasdaq Composite fell 3.6 per cent, its worst day since October 2022. The losses in both were driven by big tech stocks, including Nvidia, Microsoft, Apple and Tesla. Tech — and artificial intelligence stocks in particular — have driven the bulk of market gains this year.
Tesla fell 12.3 per cent, its worst daily performance since 2020, after the electric-car maker on Tuesday announced profits well short of expectations. Google parent Alphabet fell 5 per cent, its worst day since January, despite narrowly beating analysts’ revenue forecasts. Advertising revenue from YouTube missed consensus estimates.
The sell-off deepens a recent slump for the high-flying tech sector, as investors have backed away from stocks boosted by the promise of AI in favour of unloved corners of the market such as smaller companies.
Chipmaker Nvidia was the biggest drag on the S&P 500, down 6.8 per cent on Wednesday, while Super Micro Computer and ASML Holdings, semiconductor stocks, were the biggest laggards in the Nasdaq.
The Nasdaq is down more than 7 per cent from its closing high on July 10, after which lower than forecast US inflation first triggered the dramatic market rotation.
Alphabet and Tesla’s results would “feed concerns” that the broader market had become too reliant on the Magnificent Seven of big tech stocks, said Charlie McElligott, an analyst at Nomura.
“Risk sentiment remains fragile,” he added.
UBS on Wednesday reiterated its “sell” rating on Tesla’s stock, warning that the “timeframe and probability of success” of plans to roll out self-driving “robotaxis” remains unclear.
On Tuesday, Tesla’s billionaire chief executive Elon Musk officially pushed back the unveiling of the vehicles from August to October. However, he claimed the project could still take the company’s valuation as high as $5tn — about six times its current market value.
Google’s capital spending and outlook was being used as an indicator for the wider trend of backing companies with links to generative AI, said analysts.
All of the so-called Magnificent Seven were lower on Wednesday. In addition to Nvidia, Facebook parent Meta slid 5.6 per cent, Microsoft fell 3.6 per cent and Apple fell 2.9 per cent.
“We’ve got some of the Magnificent Seven digging their heels in, in terms of spending on AI,” said Kevin Gordon, a senior investment strategist at Charles Schwab, “and if they’re not wildly exceeding [earnings] expectations, that’s when you get some profit-taking.”
The Russell 2000 index of smaller companies, which has recently rallied strongly on hopes of interest rate cuts as soon as September, fell just 2.1 per cent.
Wednesday’s sell-off comes as “the macro picture appears to be cracking”, said JPMorgan analysts in a note to clients, who highlighted weakening regional activity data and a housing market that continued “to crumble”.
US Treasuries rallied as investors sought safe assets and ramped up bets on Federal Reserve interest rate cuts. Two-year yields, which are highly sensitive to rate expectations, fell 0.03 percentage points to 4.42 per cent, having earlier in the day reached their lowest levels since February.
Big Tech companies including Meta, Amazon and Apple will report earnings next week.
This article has been updated to clarify the date of the Nasdaq’s recent closing high
