(Bloomberg) — A disappointing start to earnings season at major companies sent stocks tumbling and stoked speculation that the artificial intelligence boom that has powered the bull market has yet to pay off.
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The selloff in the world’s biggest technology companies pushed the S&P 500 to its worst drop since the peak of the regional banking crisis in March 2023. Losses were more pronounced in the Nasdaq 100, which fell 3%. Alphabet slumped 5% after it poured more resources into an effort to beat rivals in AI, prompting more spending than analysts had expected. Tesla slumped 10% after profits missed again and it postponed the unveiling of its robotaxi.
Big technology companies, which have been driving stock market gains for much of 2024, have hit a wall. Traders, spurred by bets that the Federal Reserve will cut interest rates and concerns that the hype about AI may be overblown, have switched from large caps to market laggards.
“Investors are finally starting to wake up to spending on AI and realize that for now, AI is more of an expense than a revenue stream,” said Peter Boockvar of the Book Report.
Goldman’s top stock analyst is waiting for the AI bubble to burst
For the fourth straight session and the 10th time in 11 days, smaller stocks outperformed their larger counterparts, further evidence that investors are moving away from the mega-cap tech stocks that have come to dominate the benchmark indexes. The Russell 2000 is up 2.4% this week, while the S&P 500 is down 0.9% and the Nasdaq 100 is down 1.8%.
Treasury yields fell, but the move was led by shorter-term bills. Former New York Fed President William Dudley called for lower borrowing costs, possibly at a meeting next week. For many analysts, such a move would be worrying because it would signal regulators are rushing to head off a recession.
The Canadian dollar was shaken after the Bank of Canada cut interest rates in response to “downside risks,” while the yen hit its highest since May as carry trades were unwound.
Steve Clayton, head of equity funds at Hargreaves Lansdown, said Tesla and Alphabet’s performance alone would not be enough to maintain momentum and that this could be the year the market starts talking about the “so-so seven”.
“The market has been less than impressed with the start of earnings season for big tech stocks,” said Kathleen Brooks, director of research at XTB. “There’s a lot riding on these earnings, and I don’t think they provide clear answers to questions about the effectiveness and profitability of AI at this point.”
Overall, the second-quarter earnings season got off to a weaker start than usual.
Among S&P 500 companies that reported earnings, the margin by which profit beat analyst expectations was the smallest since the end of 2022, while the revenue surprise was the worst in at least the past two years, according to data compiled by Bloomberg.
Amid a flurry of earnings reports, a key technical indicator in the U.S. stock market appears to be stretched at historic extremes – a key indicator that has predicted stock market declines in the past.
Known as the “200-day moving average,” the index measures how the S&P 500 performs against longer-term benchmarks. At one point last week, the index was trading as much as 15% above the S&P 500, according to data compiled by Bloomberg.
That doesn’t necessarily mean the market will crash, but it’s a warning sign for investors concerned about high tech stock prices and concentration risk.
The recent sell-off in U.S. stocks is sending a warning signal to trend-following funds: sell U.S. stocks no matter which way the market moves.
According to models from Goldman Sachs Group Inc.’s trading desk, the Nasdaq 100 and S&P 500 indexes both crossed thresholds that triggered sell signals for commodity trading advisors, or CTAs.
If stock prices continue to fall, rules-based traders could sell $32.9 billion in global equities, with $7.9 billion of that coming out of the U.S. market, according to an analysis by the bank’s trading desk. Even if the market reverses the decline, CTAs are still poised to sell $902 million in U.S. equities.
Company Highlights:
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Texas Instruments Inc. offered a sales outlook that suggested an end to inventory gluts is near and reassured investors that a recovery is underway in a key market for its semiconductors.
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AT&T added many more wireless subscribers in the second quarter than Wall Street expected, as fewer customers canceled their contracts and many added wireless service to their broadband plans.
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Visa Inc. reported quarterly earnings that slightly missed Wall Street expectations, unusual for the world’s largest payments network.
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Pfizer Inc’s gene therapy for a serious bleeding disorder hit its target in a pivotal late-stage trial, paving the way for the company to enter a market that has proven difficult for drugmakers.
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Deutsche Bank said it likely won’t buy back its second share of the year after suffering its first quarterly loss in four years.
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Kering SA warned that profits will fall sharply in the second half of the year as demand for luxury goods cools and turnaround efforts at its biggest brand, Gucci, continue to falter.
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Renault SA said first-half profit rose to a record, benefiting from lower raw material prices and solid demand for its more expensive sport utility vehicles such as the Austral and Espace.
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Blackstone Mortgage Trust, which provides loans to commercial real estate, is cutting its dividend by 24% as defaults rise and borrowers struggle to make payments or refinance loans.
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CrowdStrike Holdings, the cybersecurity firm at the centre of a global IT outage, said a bug in its security mechanisms caused an update to go awry, exposing faulty data to customers and sparking last week’s systems outage.
Major events this week:
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German IFO Business Environment, Thursday
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US GDP, initial jobless claims, durable goods, Thursday
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US Personal Income, PCE, Consumer Sentiment Friday
Some of the key market developments:
stock
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The S&P 500 was down 1.8% as of 12:40 p.m. New York time.
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The Nasdaq 100 fell 3%
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The Dow Jones Industrial Average fell 0.8%.
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The MSCI World Index fell 1.4%
currency
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The Bloomberg Dollar Spot Index fell 0.2%.
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The euro was little changed at $1.0848
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The British pound rose 0.1% to $1.2923.
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The Japanese yen rose 1.3% to 153.58 yen to the dollar.
Cryptocurrency
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Bitcoin rose 0.7% to $66,345.01.
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Ether fell 1.8% to $3,420.66.
Bonds
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The yield on the 10-year Treasury note fell 2 basis points to 4.23%.
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German 10-year government bond yields were little changed at 2.44%
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UK 10-year government bond yields rose 3 basis points to 4.16%.
merchandise
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West Texas Intermediate crude rose 1.2% to $77.90 a barrel.
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Spot gold rose 0.4% to $2,420.07 an ounce.
This story was produced with assistance from Bloomberg Automation.
–With assistance from Lu Wang, Jessica Menton, Sagarika Jaisinghani, Joel Leon, Natalia Kniazhevich, Alex Nicholson, Julien Ponthus, and Aya Wagatsuma.
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