Tech investors were jolted back to reality.
The S&P 500 and Nasdaq both plunged on Wednesday.
The tech-heavy Nasdaq fell 3.7%, while the S&P 500 fell 2.3%, its worst performance since 2022.
Stock markets around the world plunged after a series of disappointing corporate earnings reports from the U.S. and Europe.
The decline came after U.S. electric car giant Tesla (one of the “seven great stocks” leading the global rally this year) reported a decline in second-quarter profit.
Combined, they lost about $1.5 trillion (about 691 billion dollars) in value.
European and Asian markets also closed lower. As of 2.25pm AEST, the ASX200 was down 1.13%.
“The reasons for the weakness are pretty clear,” said Briefing.com analyst Patrick O’Hare, pointing to a report that said Tesla’s second-quarter profit fell 45% due to price cuts and aggressive investments in AI.
Tesla's stock price fell more than 11%.
Shares of Google parent Alphabet fell about 4%, which O'Hare attributed to lower-than-expected advertising revenue on YouTube, but overall the company beat earnings and revenue estimates.
Alphabet is also one of the so-called “Magnificent Seven” tech giants that played a key role in driving market gains that pushed Wall Street to multiple record highs in 2024.
Other companies (Apple, Amazon, Facebook parent Meta, Microsoft, Nvidia) are expected to report in the coming weeks.
“The first look at Big Tech earnings was not encouraging,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“Two of the Magnificent Seven stocks reported second-quarter earnings yesterday to less than enthusiastic responses, coming at a time when investors were questioning whether the AI rally had run its course,” she said.
Stocks have surged this year on growing expectations that the Federal Reserve will cut interest rates amid slowing inflation and a weak labor market.
The prospect of a more welcoming lending environment has been a boon for technology companies, which have invested heavily in AI, seeing it as the next big moneymaker.
“After a string of weaker-than-expected earnings reports, including from Tesla, LVMH and the U.S. Postal Service, it’s hard to see how the market rally can continue at this point,” said Kathleen Brooks, research director at trading platform XTB.
“Recent corporate earnings have led to concerns that stocks may not deliver the earnings growth needed to fuel the next rally,” she added.
The Paris CAC 40 fell 1.1%, while shares in luxury goods giant LVMH fell 4.5% after reporting a 14% drop in net profit in the first half of the year.
Frankfurt's DAX index also fell, down 0.9%, while Deutsche Bank fell 8.6% after reporting a loss of 143 million euros ($155 million) in the second quarter.
Investors are also awaiting key U.S. economic growth data and the latest figures on personal consumption expenditures (the Fed’s preferred inflation measure) later this week, which could influence decision makers’ thinking ahead of the next meeting.
The yen rose about 1.5% against the dollar. “Attention now turns to next week's Bank of Japan meeting, with speculation growing that the central bank will raise rates by 10 basis points,” said Fawad Razakzada, a market analyst with City Index and FOREX.com.
Traders are cautiously watching the outlook for policy after the US elections, with Democratic candidates Kamala Harris expected to be nominated as successor to President Joe Biden, who will face Donald Trump in November.
