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Shares of Netflix and Tesla experienced a sharp decline in early trading on Thursday, leading to a drag on Wall Street due to disappointing second-quarter earnings reports.
The S&P 500, a benchmark for Wall Street, registered a 0.4% loss, breaking its three-day winning streak, while the tech-heavy Nasdaq Composite dropped by 1.1%.
Tesla’s shares fell by 6.2% after the electric-car manufacturer reported a decrease in profit margins due to price cuts affecting earnings. Netflix, on the other hand, decreased by 8.4% after failing to meet sales estimates and providing lower guidance for the third quarter.
Large tech companies have been the driving force behind the Wall Street rally this year, with investors riding the wave of AI hype and hoping for limited global interest rate hikes.
“The Wall Street rally has mainly been driven by the tech sector, while the rest of the market has remained relatively flat since the beginning of the year,” said Anthi Tsouvali, multi-asset strategist at State Street Global Markets.
She added, “We talk about this euphoria because the market is reaching new highs, but ultimately it’s driven by a very small portion of the market. This is why it could become highly volatile if tech earnings do not meet expectations.”
The tech sell-off also had an impact in Europe, as Taiwan Semiconductor Manufacturing Company lowered its 2023 outlook, highlighting the potential limitations of artificial intelligence to offset the overall slowdown in global demand.
Shares of Dutch chipmaker ASML declined by almost 3% despite reporting increased orders in the second quarter, thanks to demand from China. ASM International experienced a nearly 6% drop.
The drop in tech stocks was offset by positive mining sector earnings, notably with precious metals miner Anglo American reporting a 4% jump in first-half copper production. The Stoxx 600 Basic Resources index increased by 1.4%.
Europe’s region-wide Stoxx 600 rose by 0.4%, France’s Cac 40 gained 0.8%, and Germany’s Dax increased by 0.6%.
Meanwhile, the number of US jobless claims unexpectedly decreased to 228,000 in the week ending July 15, the lowest level since mid-May, indicating sustained resilience in the labor market amidst rising interest rates. Economists polled by Reuters had predicted the figure to rise to 242,000.
Tom Hopkins, portfolio manager at BRI Wealth Management, commented, “It takes time for interest rate hikes to impact the real economy, so many economists are predicting an increase in layoffs in the second half of this year.”
The US Federal Reserve is highly anticipated to raise the federal funds rate by 0.25 percentage points next Wednesday, although lower-than-expected inflation data last week suggests their tightening cycle could soon come to an end.
Market expectations anticipate a 0.25 percentage point increase for the European Central Bank’s benchmark deposit rate next week, bringing it to 3.75%, but opinions are divided on whether rates will continue to rise after dovish remarks from policymakers earlier in the week.
Henry Allen, macro strategist at Deutsche Bank, noted, “Central banks may be nearing the end of their current rate-hiking cycle, especially with recent positive inflation numbers.”
The trend of central bank caution also influenced the UK, as data revealed lower-than-expected inflation in June, leading to speculation that the Bank of England may opt for a smaller rate increase at their August meeting. London’s FTSE 100 index rose by 0.7% in response.
In Asia, equities experienced a decline, with China’s benchmark CSI 300 index dropping by 0.7% and Hong Kong’s Hang Seng losing 0.1%.
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