Stocks Slide on Concern AI Still a ‘Show Me’ Story: Markets Wrap

(Bloomberg) — Stocks got hammered after a disappointing start of the megacap earnings season fueled speculation the artificial-intelligence frenzy that has powered the bull market still needs to pay off.

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A selloff in the world’s largest technology companies sent the S&P 500 toward its worst session in almost three months. Alphabet Inc. slumped 4% after the Google parent sunk more resources into its drive to outmatch rivals in AI, fueling spending higher than analysts expected. Tesla Inc. reported another profit miss and postponed the unveiling of autonomous taxis — plunging 12%.

While high-flying megacaps have been responsible for the bulk of this year’s equity market gains, traders are looking for more evidence of the return on investment for the billions and billions of dollars spent in AI.

“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.

The S&P 500 dropped 1.5%, while the tech-heavy Nasdaq 100 lost 2.5%. A Bloomberg gauge of the “Magnificent Seven” megacaps slumped over 4% — largely underperforming a measure of smaller firms.

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

The loonie was steady after the Bank of Canada rate decision to cut rates — with the move focused on “downside risks.” Weak data out of Europe also weighed on sentiment.

Steve Clayton, head of equity funds at Hargreaves Lansdown, said 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.”

The biggest tech stocks have been hammered in the past week as investors flocked to small caps on bets they would finally benefit from expected Fed rate cuts.

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 just as Big Tech earnings results roll in.

Known as the “the 200-DMA” — an abbreviation of 200-day moving average — the gauge measures how the S&P 500 Index 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, Thrasher said.

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.
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 1.5% as of 10:41 a.m. New York time
The Nasdaq 100 fell 2.4%
The Dow Jones Industrial Average fell 0.9%
The Stoxx Europe 600 fell 0.5%
The MSCI World Index fell 1.1%
Bloomberg Magnificent 7 Total Return Index fell 4.4%
The Russell 2000 Index fell 0.4%

Currencies

The Bloomberg Dollar Spot Index fell 0.2%
The euro was little changed at $1.0859
The British pound rose 0.1% to $1.2921
The Japanese yen rose 1.4% to 153.39 per dollar

Cryptocurrencies

Bitcoin rose 1.6% to $66,892.38
Ether fell 1.1% to $3,446.1

Bonds

The yield on 10-year Treasuries declined two basis points to 4.23%
Germany’s 10-year yield advanced one basis point to 2.45%
Britain’s 10-year yield advanced three basis points to 4.16%

Commodities

West Texas Intermediate crude rose 0.9% to $77.63 a barrel
Spot gold rose 0.7% to $2,425.58 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Alex Nicholson, Julien Ponthus, Aya Wagatsuma, Sagarika Jaisinghani, Joel Leon and Jessica Menton.