$1.05 trillion plunge hits Wall Street as tech companies suffer

Tech companies are no longer the darling of investors as the “Magnificent Seven” reported a drop in earnings.

Tech investors have been brought back to reality with a thump.

The S&P 500 and Nasdaq were both pommeled on Wednesday (US time).

The tech-heavy Nasdaq slid 3.7 per cent while the S&P 500 slumped 2.3 per cent, its worst result since 2022.

Worldwide, stock markets tumbled following a batch of disappointing corporate results in the United States and Europe.

The drop came after US electric car giant Tesla — one of the “Magnificent Seven” stocks that have fuelled a global rally this year — reported a drop in second-quarter profits.

Combined, they lost about $1.05 trillion ($US691 billion) in value.

European and Asian markets also closed lower. As of 2.25pm AEST the ASX200 is down 1.13 per cent.

Tech stocks have taken a beating. Picture: iStock

“The reasons for the weakness are pretty clear cut,” said Briefing.com analyst Patrick O’Hare, pointing to Tesla’s report showing profits fell 45 per cent in the second quarter owing to price cuts and aggressive AI investment.

Tesla shares tumbled more than 11 per cent.

Shares in Google-parent Alphabet fell around four per cent, which O’Hare put down to lower-than-expected advertising revenue at YouTube, although overall the company beat profit and revenue expectations.

Alphabet is also one of the so-called Magnificent Seven tech kings that have been key to driving gains in markets that have pushed Wall Street to multiple record highs in 2024.

The others — Apple, Amazon, Facebook-parent Meta, Microsoft and Nvidia — are due to report over the next few weeks.

“The first view on Big Tech earnings wasn’t inspiring,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Two of the Magnificent Seven stocks failed to create euphoria when they reported their second quarter results yesterday. The less-than-ideal set of earnings comes at a time when investors are questioning whether the AI rally has gotten ahead of itself,” she said.

A sign at Meta’s headquarters in Menlo Park, California. Picture: AFP

Equities have largely been boosted this year by growing expectations that the US Federal Reserve will cut interest rates thanks to slowing inflation and a softening of the labour market.

The prospect of a more welcoming borrowing environment has heavily benefited tech firms, particularly as they have invested massively in AI, seeing it as the next big money-spinner.

“It is hard to see how the rally in markets can continue for now after several weaker than expected earnings reports including Tesla, LVMH and the US postal service,” said Kathleen Brooks, research director at trading platform XTB.

The latest corporate results “have led to concerns that stocks will fail to deliver the boost to earnings that would spur the next leg of the rally”, she added.

Tech companies are under pressure from investors. Picture: AFP

The Paris CAC 40 retreated 1.1 per cent, with shares in luxury giant LVMH falling 4.5 per cent after it posted a 14-percent drop in net profit in the first half of the year.

The Frankfurt DAX was also in the red, shedding 0.9 per cent, with Deutsche Bank sinking 8.6 per cent after it reported a loss of 143 million euros ($155 million) in the second quarter.

Investors are also awaiting later this week the release of key US economic growth data and the latest reading on personal consumption expenditure — the Fed’s favoured gauge of inflation — which could play a role in decision-makers’ thinking ahead of their next meeting.

The yen jumped around 1.5 per cent higher against the dollar. “Attention is now turning to the Bank of Japan meeting next week, and there is growing speculation that the central bank will raise interest rates by ten basis points,” said market analyst Fawad Razaqzada at City Index and FOREX.com.

Traders are also treading cautiously as they weigh the outlook for US policy post-election, with Democratic chances boosted by the expected nomination of Kamala Harris to replace President Joe Biden to battle Donald Trump in November.