Wall Street fell on Wednesday, with the tech-heavy Nasdaq leading declines after lackluster quarterly results from Tesla and Alphabet raised questions about the sustainability of the Big Tech and AI-led 2024 equity rally.
Tesla (TSLA.O) slumped 11.2% and was set to lose over $83 billion in market value from Tuesday's close, if losses hold, after the EV maker reported its lowest profit margin in more than five years and missed second-quarter earnings estimates.
Google parent Alphabet (GOOGL.O), too, shed 4.1% 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 (MSFT.O), Amazon.com (AMZN.O), Meta Platforms (META.O) and Nvidia (NVDA.O) down between 0.8% and 2.9%.
Chary 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 (.RUT) fell 0.3% after a 1% gain in the previous session, while Tesla and Alphabet's results dragged the Communication Services (.SPLRCL) and Consumer Discretionary (.SPLRCD) sector indexes down more than 2% each.
In economic data, S&P Global's flash U.S. 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 U.S. 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.
At 9:51 a.m. ET, the Dow Jones Industrial Average (.DJI) was down 203.99 points, or 0.51%, at 40,154.10, the S&P 500 (.SPX) was down 64.25 points, or 1.16%, at 5,491.49, and the Nasdaq Composite (.IXIC) was down 328.36 points, or 1.82%, at 17,669.00.
In other earnings, AT&T (T.N) gained 3.6% after beating forecasts for wireless subscriber additions.
Visa (V.N) was the biggest Dow decliner, dropping 3.9% after its third-quarter revenue growth fell short of expectations.
Solar inverter maker Enphase Energy (ENPH.O) jumped 7.4% after beating estimates for second-quarter operating profit, while General Dynamics <GD.N> fell 5.1% after delivering fewer business jets than expected in the second quarter.
Rivian Automotive (RIVN.O) lost 6.3%. 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.
