Earnings reports from Google’s parent company, Alphabet, and Tesla on Tuesday led to a drop in big tech stocks, while shares of smaller companies remained strong.
The S&P 500 fell 1.8 percent on Wednesday, while the technology-heavy Nasdaq tumbled 2.9 percent. The Russell 2000, an index of smaller companies that’s considered to be more tied to the ebb and flow of the economy, was down just 0.48 percent, in line with trading in recent weeks and indicating that shares of smaller companies stayed relatively robust.
Investors were expecting perfection from the tech giants’ earnings reports, said Daniel Ives, a tech analyst at Wedbush Securities. The sell-off indicates that investors are disappointed by the reports, but their response amounts to nothing more than “a blip in the radar,” as tech companies are poised to be bolstered by the artificial intelligence boom, Mr. Ives added.
“Investors are negatively reacting to any whiff of softness that we see from these big tech players,” he said. “I think it’s an overreaction after a massive run in tech stocks.”
Here’s what to know about the trading.
Tesla stocks fell more than 10 percent on Wednesday, after the company on Tuesday reported a 45 percent drop in profit in the quarter ending in June, a result of the electric car company’s sluggish sales. Tesla’s current operating profit margin, a measure of how much money it makes on every dollar of revenue, was 6.3 percent, down from 9.6 percent in the same period a year ago. Investors are waiting to see if Tesla, with Elon Musk at the helm, can find new ways to generate revenue.
Even though Alphabet reported on Tuesday that it beat earnings and revenue expectations, shares of the company fell more than 4.6 percent on Wednesday. Advertising sales at YouTube, which is owned by Google, climbed 13 percent to $8.7 billion, missing the $8.9 billion figure expected by analysts. Investors are likely to be concerned about whether Alphabet can widen its margins in the coming months.
Shares of other big tech companies also fell. Nvidia shares dropped more than 5 percent, while Meta’s stock was down more than 4 percent. “The scale of market move today demonstrates what investors have been talking about for quarters: that increasing market concentration in a handful of companies creates a risk in itself for holders of the major equity indices,” Lauren Goodwin, an economist at New York Life Investments, said in an emailed statement.
There has also been a broader shift among investors away from tech and toward smaller stocks, as macroeconomic dynamics appear increasingly favorable to smaller companies’ shares. Consumer Price Index data released this month showed a further cool-down in inflation, solidifying investors’ expectations that the Federal Reserve will start to cut interest rates in September. The potential for lower interest rates could catalyze a shift to investment in small and medium-sized companies, Ido Caspi, a research analyst at Global X, said in a statement.