Last week, the Nasdaq experienced its 70th correction in its 52-year history.
The tech-heavy index, known for its dominant “Magnificent Seven” and high sensitivity to interest rates, has declined approximately 23% year-to-date. With increased geopolitical risks and rising Treasury yields, investors are now seeking positive results in stocks that were once considered highly promising – but the earnings of Big Tech companies have fallen short of expectations.
Amazon (AMZN) reported beats on both top and bottom lines, but its cloud revenue fell short of analysts’ expectations, despite experiencing a 12% year-over-year growth. Similarly, Alphabet (GOOG, GOOGL) surpassed revenue and EPS estimates but significantly underperformed on cloud revenues, generating $8.41 billion compared to the anticipated $8.6 billion.
The only exception was Microsoft (MSFT), which exceeded expectations in both revenue and growth, particularly with its Azure business in the cloud sector.
Meanwhile, Tesla (TSLA) significantly missed Wall Street estimates, and Apple (AAPL), which will report next week, has experienced a slowdown in device sales in 2023.
Social media giant Meta (META) exceeded estimates but issued conservative Q4 guidance, citing geopolitical unrest – a sentiment echoed by Snap (SNAP).
“The key factor was relying too much on the ongoing outperformance of a limited number of large-cap tech stocks,” stated Interactive Brokers chief strategist Steve Sosnick. “While these market-cap weighted indices perform remarkably well when their major components excel, they perform poorly when those stocks falter.”
It’s not that these earnings were entirely disappointing; they simply provided a reality check for a market that had been excessively optimistic about AI. Despite this, Amazon’s stock has risen by over 50% year-to-date, while Microsoft’s stock has seen a nearly 40% increase within the same timeframe.
However, the macroeconomic environment is becoming more challenging. High interest rates increase capital costs and make safe investments like CDs more appealing. The consumer is also in a precarious position, dealing with the resumption of student loan payments, rising gas costs, approaching 8% mortgage rates, and stubborn inflation.
In addition, although AI holds great potential, it has yet to be fully monetized. This process will require time. For example, Oracle (ORCL) faces a shortage of Nvidia (NVDA) chips needed to train and deploy its AI services, despite the strong demand. This problem extends to other tech giants like Alphabet, Microsoft, and Amazon, all of which conduct business with Nvidia. Andy Jassy, CEO of Amazon, mentioned on an earnings call that the company is exploring ways to further monetize its cloud service, AWS.
For investors, perspective depends on whether they take a long-term or short-term view. “Long-term investors shouldn’t pay much attention to these types of market movements,” advised GraniteShares CEO and founder Will Rhind. “Interest rates are likely at their peak, and the economy is still in relatively good shape.”
However, in times like these, Rhind emphasized the importance of investing in quality companies that demonstrate growth and earnings sustainability. For those focused on the near to medium term, it is crucial to resist blindly following the herd.
“When a stock like Google drops by 10%, it triggers a vicious deleveraging cycle where investors are forced to sell companies they have high confidence in to meet margin calls,” warned Ivana Delevska, Founder and CIO of Spear Invest. Nevertheless, not all market movements are equal, and even high-quality companies like Google may be affected by fire sales, without underlying issues in their fundamentals.
Nasdaq corrections have historically been associated with significant events, such as the bursting of the dot-com bubble in 2000 and the onset of the COVID-19 pandemic.
“We prefer broad market rallies over narrow ones for a reason. In the latter case, the market suffers unless money shifts from the leaders to the laggards,” observed Sosnick. “When money flows out of the leaders and out of the market altogether, that becomes a problem. Some of that was evident this week.”
Allie Garfinkle is a Senior Tech Reporter at Yahoo Finance. Follow her on X, formerly Twitter, at @agarfinks and on LinkedIn.
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