- U.S. stock indexes dropped to their worst losses since 2022 after profit reports from Tesla and Alphabet helped suck momentum from Wall Street’s frenzy around artificial-intelligence technology.
- Tesla tumbled 12.3% after reporting a 45% drop in profit for the spring, and its earnings fell short of analysts’ forecasts.
- Alphabet dropped 5% even though it delivered better profit and revenue for the latest quarter than expected, as analysts pointed to weakness in areas like YouTube advertising revenue and concerns over increased AI investments.
The S&P 500 tumbled 2.3% on Wednesday for its fifth drop in the last six days. The Dow Jones Industrial Average dropped 504 points, or 1.2%, and the Nasdaq composite skidded 3.6%.
The profit reports from Tesla and Alphabet weren’t disasters, but they raised concerns among investors about which other market heavyweights’ springtime results could fall short of expectations, said Sam Stovall, chief investment strategist at CFRA.
“How many disappointments are we likely to see? Maybe let’s sell first and ask questions later,” Stovall said.
Tesla was one of the heaviest weights on the market and tumbled 12.3% after reporting a 45% drop in profit for the spring, with earnings falling short of analysts’ forecasts.
Investors losing patience with big AI investments
Alphabet dropped 5% even though it delivered better profit and revenue for the latest quarter than expected. Analysts pointed to some pockets of weakness, including weaker growth in YouTube advertising revenue than expected. They also said increased AI investments and other spending could limit cash generation.
The larger challenge for Alphabet may have simply been how much its stock has already rallied, nearly 50% in the 12 months through Tuesday, based on expectations for continual growth.
‘Magnificent Seven’ stocks face high profit expectations
Profit expectations are high for U.S. companies broadly, but particularly for the “Magnificent Seven” stocks of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. These stocks need to keep delivering powerful growth after driving much of the S&P 500’s rally to records this year. Critics are also calling them too expensive following their surges.
Smaller stocks had offered hope before losses
The hope on Wall Street was that if momentum slowed for the Magnificent Seven, more stocks outside that group could rise to support the market. Smaller stocks had been jumping recently on hopes for imminent interest rate cuts. But the Russell 2000 index of smaller companies dropped 2.1% on Wednesday, slamming on the brakes.
Mixed signals on economy and rates
Treasury yields were mixed after data suggested business activity is shrinking again in manufacturing but still growing in services. This Goldilocks scenario of not too hot and not too cold was seen as helpful for rates. But the 10-year Treasury yield ultimately rose to 4.28% from 4.25% Tuesday.
Big Tech drags indexes down despite some bright spots
The problem for Wall Street is that even if more stocks rise, they’ll likely need to do so more than Big Tech stocks are falling to counter the large influence tech has on indexes.
Nvidia fell 6.8%, which was the single heaviest weight on the S&P 500. Its total value tops Tesla’s, so a 1% move for Nvidia has an outsized impact.
Indexes ended sharply lower, with the S&P 500 down 128 points at 5,427, the Dow off 504 points at 39,854, and the Nasdaq losing 655 points to end at 17,342.
