Are the turbulent times for the US stock market just beginning as the financial reports of tech giants disappoint?
Tech giants in the US stock market, known as the "Seven Sisters," have been driving the market to new heights this year. However, after the release of third-quarter earnings reports by companies such as Meta and Google, their stocks plummeted, resulting in a combined market value loss of over $200 billion. The downward trend in the US stock market continued on the 26th, with the Nasdaq index falling by 1.2% during trading hours. Analysts believe that the heavy weighting of tech stocks in the S&P 500 index poses a risk to the entire market if their earnings reports disappoint.
The "Magnificent Seven," consisting of Apple, Microsoft, Google, Amazon, Nvidia, Tesla, and Meta, have driven the US stock market to soar this year. However, the disappointing performance of these tech giants in their recent earnings reports has led to a market value loss of approximately $200 billion, and even the possibility of a 10% decline in the S&P 500 index from its peak, entering a technical consolidation phase.
Currently, Google, Tesla, and Meta have all experienced significant declines after announcing their earnings reports, with only Microsoft being the sole bright spot. Data shows that after the earnings reports of these tech giants were announced, as of the pre-market session on the 26th Eastern Time, Meta's market value evaporated by $29 billion, Tesla by $72 billion, and Google's parent company Alphabet wiped out a staggering $180 billion in market value, while Microsoft's market value increased by $75 billion. In total, these four companies have lost a combined market value of $205 billion.
Amazon is set to announce its earnings report after the market closes on Thursday, the 26th Eastern Time. The options market dynamics predict that the stock's daily fluctuation could reach 8.1%, equivalent to approximately $100 billion in market value. Apple and Nvidia, on the other hand, will announce their earnings reports next month.
The AI boom has swept in this year, making the "Magnificent Seven" the protagonists of the US stock market. However, the high interest rate environment and geopolitical turmoil in the Middle East are causing optimism to wane. The S&P 500 index has already fallen by 8.8% from its peak in 2023, with only a small step away from a 10% technical consolidation.
During the earnings conference, Meta stated that the uncertainty of the economic environment may cause advertising revenue recovery to be short-lived, disappointing investors' expectations for long-term recovery. Alphabet's earnings report showed that the company's cloud business profits fell short of expectations, leading to a market value loss of nearly $180 billion on Wednesday, marking a new record for the company's single-day market value decline. Earlier this month, Tesla also experienced a $72 billion market value loss in a single trading day after announcing its earnings report.
Among the tech giants that have announced their earnings reports, the only bright spot is Microsoft. The company's earnings report, announced after the market closed on Tuesday Eastern Time, showed first-quarter performance exceeding expectations, leading to a $75 billion increase in market value on Wednesday.
Currently, in terms of cloud infrastructure, both Google and Microsoft are lagging behind Amazon. Therefore, both companies are making every effort to develop AI products to integrate into their platforms in order to attract more customers. Amazon's earnings report, to be announced after the market closes on Thursday Eastern Time, will receive more attention due to the divergence in the trends of Google and Microsoft.
The major tech stocks continued to decline on Thursday Eastern Time. Meta fell more than 6% during the trading session, but the decline narrowed to around 3% and closed at $289.27. Alphabet dropped 1.78% to $124.41, Tesla fell 1.42% to $212.59, and Microsoft declined 2.94% to $330.65. The Nasdaq Composite Index fell 1.2% to 12,667.57 points on Thursday. Although there is still a lot of optimism in the market, it is important to note that the Nasdaq 100, which is dominated by the "Big Seven" technology stocks, has already risen by 31% this year, which means that there is still a significant downside potential.
Technology stocks are crucial to the US stock market. Data shows that the market value of the "Big Seven" accounts for one-fourth of the total market value of the S&P 500 index, which means that by closely monitoring the financial reports of these major companies, investors can predict the future direction of the market. If the major technology stocks are excluded, the average profit of S&P 500 companies in the third quarter is expected to decline by 5%; but if the "Big Seven" are included, the profitability of S&P 500 companies is expected to remain flat.
According to data from FactSet, Nvidia is expected to lead the profit growth of S&P 500 companies in the third quarter. If this company is excluded, the average profit decline of S&P 500 companies will increase from 0.4% to 1.8%.
Analysts believe that a market with such a high weighting of technology stocks may pose problems, as the valuation of tech giants can pose risks to the entire market, considering that the profits of tech giants account for almost all the profits of US companies so far this year. The lack of market breadth means that investors still have a strong tendency to chase trends and become overly excited about different market themes and stories, such as artificial intelligence.
Moreover, this also narrows the margin of error for the financial reports of the major tech giants, and investors tend to be cautious before the release of these reports.