Stocks Get Hit as ‘AI Trade’ Slams Into a Wall: Markets Wrap

(Bloomberg) — Wall Street got a reality check after a disappointing start of the megacap earnings season fueled concern the artificial-intelligence frenzy that has powered the bull market might be overblown.

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The world’s largest technology companies sent the S&P 500 toward its worst slide since the height of the regional-bank crisis in March 2023. Losses were more pronounced in the Nasdaq 100, which dropped 3%. Alphabet Inc. slid 5% after sinking more resources into its drive to outmatch rivals in AI, fueling spending higher than analysts expected. Tesla Inc.’s profit miss and the Robotaxi delay drove its shares down 10%.

“Investors are finally waking up to all that AI spend and realizing it is much more of an expense right now rather than a revenue generator,” said Peter Boockvar at The Boock Report.

Wednesday’s session was another lesson in the “concentration risk” bears see as latent in a market whose upside has owed disproportionately to a narrow cohort of massive gainers. For a fourth straight session — and the 10th time in 11 days — the performance of smaller companies exceeded larger ones, evidence investor tastes have shifted from the megacap tech names that have come to dominate benchmark indexes.

Goldman’s Top Stock Analyst Is Waiting for AI Bubble to Burst

Treasury yields fell, with the move led by shorter maturities. Former New York Federal Reserve President William Dudley called for lower borrowing costs — preferably at next week’s gathering. For many analysts, such a move would be worrisome as it would indicate officials rushing to avoid a recession.

The loonie edged lower asr the Bank of Canada cut rates, with the move focused on “downside risks.” The yen hit the highest since May amid an unwind in carry trades.

To Steve Clayton at Hargreaves Lansdown, this could be the year markets start talking about the “So-So Seven,” noting that results from Tesla and Alphabet are not enough to maintain their momentum.

“The market is not impressed with the start of earnings season for the mega tech stocks,” said Kathleen Brooks, research director at XTB. “There was a lot resting on these results and we don’t think that they give clear answers to questions about the effectiveness and profit potential for AI right now.”

After driving the rally in stocks for most of 2024, big tech slammed into a wall. Traders rotated from megacaps to lagging parts of the market, spurred by bets on Fed rate cuts and concern the AI hype still needs to pay off.

The drubbing in these stocks has seen some of the air come out of valuations. Out of the seven, only about half are still trading at a premium to their five-year average.

While that’s something that could argue in favor of dip buying, the earnings season just getting started. Apple Inc., Microsoft Corp. Amazon.com Inc. and Meta Platforms Inc. are all due to report results next week.

It’s also worth pointing out that, broadly, second-quarter earnings season is off to a weaker start than usual.

Among S&P 500 companies that reported results, profits beat analyst estimates by the smallest margin since the end of 2022 — while sales surprises were the worst in at least two years, data compiled by Bloomberg show.

Just as earnings roll in, a key technical indicator in the US stock market is looking stretched as it sits at historic extremes — a crucial gauge that has foretold past selloffs.

Known as the “the 200-DMA” — an abbreviation of 200-day moving average — the gauge measures how the S&P 500 is performing against that longer-term measure. At one point last week, the benchmark was trading as much as 15% above it, according to data compiled by Bloomberg.

Although that does not necessarily mean the market is about to tank, it is a warning sign for investors concerned about lofty tech valuations and concentration risk.

The recent slump in US stocks is flashing a warning to trend-following funds: sell US equities no matter which direction the market goes.

Both the Nasdaq 100 and the S&P 500 benchmarks have breached thresholds that trigger a selling signal for commodity trading advisers, or CTAs, according to models at Goldman Sachs Group Inc.’s trading desk.

If stocks keep falling, those rules-based traders could unwind $32.9 billion of global stocks with $7.9 billion flowing out of the US market, according to an analysis from the bank’s trading desk. Even if the market reverses its slide, CTAs are still poised to sell $902 million of US stocks.

Corporate Highlights:

Texas Instruments Inc. provided a sales outlook that signals an inventory glut is coming to an end, reassuring investors that a revival is underway in key markets for the company’s chips.
AT&T Inc. added far more mobile-phone subscribers than Wall Street expected in the second quarter, with fewer customers canceling and many adding wireless service to their broadband plans.
Visa Inc. reported quarterly revenue that just missed Wall Street estimates — a rarity for the world’s biggest payments network.
Pfizer Inc.’s gene therapy for a severe bleeding disorder met its goal in a pivotal late-stage trial, paving the way for the company to enter what’s proven to be a challenging market for drug companies.
Deutsche Bank AG said it will most likely refrain from conducting a second share buyback this year, after suffering its first quarterly loss in four years.
Kering SA warned that its profit is set to tumble in the second half of the year as luxury demand cools and turnaround efforts at Gucci, its biggest brand, continue to sputter.
Renault SA reported its highest-ever profitability in the first half as the automaker benefited from lower raw-material prices and robust demand for more expensive sport utility vehicles like the Austral and Espace.
Blackstone Mortgage Trust Inc., which provides financing for commercial real estate, is cutting its dividend by 24% as defaults increase and borrowers struggle to make payments or refinance their loans.
CrowdStrike Holdings Inc., the cybersecurity company at the center of massive global IT outages, said that a bug in a safety mechanism allowed flawed data to go out to customers in a botched update, causing last week’s meltdown.

Key events this week:

Germany IFO business climate, Thursday
US GDP, initial jobless claims, durable goods, Thursday
US personal income, PCE, consumer sentiment, Friday

Some of the main moves in markets:

Stocks

The S&P 500 fell 1.7% as of 1:49 p.m. New York time
The Nasdaq 100 fell 2.9%
The Dow Jones Industrial Average fell 0.8%
The MSCI World Index fell 1.4%
Bloomberg Magnificent 7 Total Return Index fell 5%
The Russell 2000 Index fell 0.5%

Currencies

The Bloomberg Dollar Spot Index fell 0.2%
The euro was little changed at $1.0849
The British pound was little changed at $1.2920
The Japanese yen rose 1.2% to 153.79 per dollar

Cryptocurrencies

Bitcoin rose 1.2% to $66,633.04
Ether fell 1.7% to $3,426.07

Bonds

The yield on 10-year Treasuries was little changed at 4.25%
Germany’s 10-year yield was little changed at 2.44%
Britain’s 10-year yield advanced three basis points to 4.16%

Commodities

West Texas Intermediate crude rose 1% to $77.74 a barrel
Spot gold rose 0.1% to $2,412.31 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Aya Wagatsuma, Lu Wang, Jessica Menton, Sagarika Jaisinghani, Joel Leon, Tatiana Darie, Natalia Kniazhevich, Alex Nicholson and Julien Ponthus.