Tech Stocks Stumble as Earnings Season Kicks Off With Disappointments
The start of the tech earnings season brought a wave of disappointment to investors, with shares of the "Magnificent Seven" tech giants all declining during the trading week. Alphabet Inc. (GOOGL), despite reporting stronger-than-expected earnings and revenue, missed analysts’ targets on YouTube advertising revenue, leading to its worst week of the year. Tesla Inc. (TSLA) also missed quarterly earnings forecasts, with thinner profit margins impacted by lower vehicle prices and restructuring charges. The electric-vehicle giant also postponed the announcement of the Robotaxi to October.
Key Takeaways:
- Tech Earnings Disappointments: The start of earnings season saw disappointing performances from several major tech companies, including Alphabet and Tesla, leading to stock declines.
- Economic Growth: The US economy grew at an annualized pace of 2.8% in the second quarter, exceeding expectations and potentially offsetting the effects of the tech sector’s struggles.
- Inflation Cooling: A key inflation measure followed by the Federal Reserve fell to 2.5% in June, further fueling market expectations of interest rate cuts, which could potentially benefit the overall market.
- Small-Cap Outperformance: Smaller companies continue to outperform their larger counterparts, with the Russell 2000 index marking its third consecutive week of gains, buoyed by expectations of interest rate cuts.
A Mixed Bag for the Tech Giants
Beyond the struggles of Alphabet and Tesla, other tech giants also faced challenges throughout the week. Ford Motor Company (F) and United Parcel Service Inc. (UPS) experienced the largest declines, followed by General Motors (GM), all amidst disappointing earnings reports. On the bright side, 3M Company (MMM) and Bristol-Myers Squibb Company (BMY) impressed with surprising results, driving gains in their respective shares.
The tech-heavy Nasdaq 100 index notched its second straight week in the red for the first time since April, reflecting the overall sentiment of caution and disappointment within the tech sector.
Economic Growth Provides a Counterbalance
Despite the tech sector’s struggles, the US economy appears to be holding its own. The economy grew at an annualized pace of 2.8% in the second quarter, accelerating from the first quarter and exceeding expectations of 2% growth. This positive economic news could potentially offset the negative impact of disappointing tech earnings.
Inflation Continues Its Downward Trend
An inflation measure closely watched by the Federal Reserve fell to 2.5% in June, marking the lowest levels since February 2021. This further strengthens market expectations for interest rate cuts in September. However, the Fed is still seeking a more "durable downward trend" before making any definitive decisions on rate cuts.
Small-Cap Stocks Climb Higher
Despite the difficulties faced by large companies, small-cap stocks continue to outperform, with the Russell 2000 index marking its third straight week of gains. This outperformance is being driven by the prospect of interest rate cuts, which are generally seen as favorable for smaller companies.
A Look at Other Key Events
Beyond the tech earnings news, several other events impacted the market throughout the week:
OpenAI’s SearchGPT Poses Threat to Google
OpenAI announced plans to launch SearchGPT, a tool aimed at challenging Google’s dominance in the search market. This announcement triggered a drop in Alphabet shares as investors worried about Google’s potential loss of market share. The new tool is currently undergoing a closed beta, with a waiting list of 10,000 people.
Mortgage Rates Ease Despite Weak Demand
Mortgage rates have declined to their lowest levels since February, with the average 30-year fixed interest rate falling to 6.62%. This decline is driven by investor anticipation of future interest rate cuts. However, despite these lower rates, demand among homebuyers remains weak.
A Week of Contradictions
The week’s events highlight a contradictory picture for the market. While the US economy continues to grow and inflation cools, the tech sector faces headwinds, with disappointing earnings and the emergence of potential competitors threatening established giants. How the tech sector will navigate these challenges and the impact of potential interest rate cuts will be key factors shaping the market’s trajectory in the weeks and months to come.
