New York witnessed a significant downturn in U.S. stock indexes on Wednesday, marking their worst losses since 2022. The decline was primarily triggered by disappointing profit reports from Tesla and Alphabet, which dampened the market’s enthusiasm for artificial intelligence technology. The S&P 500 experienced a sharp decline of 2.3%, marking its fifth drop in the last six days. The Dow Jones Industrial Average also suffered, dropping 504 points, or 1.2%, while the Nasdaq composite skidded 3.6%.
Tesla, one of the market’s heavyweights, saw its stock plummet by 12.3% after reporting a 45% drop in profit for the spring, falling short of analysts’ expectations. The company’s AI initiatives, such as a robotaxi, have contributed to its high valuation, but the uncertainty surrounding their success and timeframe has made it challenging to assign a clear value, according to UBS analysts led by Joseph Spak.
Alphabet, on the other hand, reported better-than-expected profit and revenue for the latest quarter. However, the stock dropped 5% as investors expressed concerns about weaker growth in advertising revenue for YouTube and increased AI investments that could impact cash generation. Despite its strong performance over the past year, with a nearly 50% rally, Alphabet’s stock faced scrutiny due to high expectations and concerns about its future growth.
The market’s focus has been on the “Magnificent Seven” stocks, including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. These companies have been driving the S&P 500’s record-breaking run this year, and their continued powerful growth is crucial. However, critics argue that these superstar stocks have become overvalued following their significant gains.
There is hope that if momentum wanes for the Magnificent Seven, other stocks outside this group can rise and support the market. Recent improvements, including expectations of interest rate cuts, have benefited smaller stocks, leading to a flip in the market’s leaderboard. The Russell 2000 index, representing smaller stocks, experienced notable gains in recent weeks. However, it dropped 2.1% on Wednesday, reflecting the overall market decline.
While preliminary data suggested a “Goldilocks” scenario for the economy, with growth in services industries and a slight contraction in manufacturing, some underlying concerns remain. Heightened uncertainty surrounding November’s elections and potential challenges lie beneath the surface, according to Chris Williamson, chief business economist at S&P Global Market Intelligence.
Amidst the market turmoil, AT&T emerged as a bright spot, rising 5.2% after reporting quarterly profits that met analysts’ expectations. Mattel also experienced a significant jump of 9.8% after surpassing profit expectations, driven by growth in its Fisher-Price and Hot Wheels lines.
The decline in Big Tech stocks, such as Nvidia, further impacted the market. Although Nvidia’s drop was not as steep as Tesla’s, it still had a significant influence on the S&P 500 due to its higher market value. The market’s reliance on these tech giants poses a challenge for other stocks to offset their decline.
Outside of the technology sector, Lamb Weston, a supplier of frozen potato products, reported weaker-than-expected profits for the latest quarter. The company attributed this to fewer diners visiting restaurants during the spring and warned of potential challenges due to softer demand caused by “menu price inflation.”