[New York Stock Market] Big Tech Stocks Plunge on Disappointing Earnings... Is the 'AI Boom' Tech Bubble Bursting?

Tesla down 12% and Alphabet down 5% after previous day's earnings announcement
S&P 500 and Nasdaq see largest decline since 2022
Concerns over collapse of tech stock rally riding the 'AI fever' wave

Concerns over the "Artificial Intelligence (AI) bubble theory" spread, causing the U.S. New York stock market to plunge on the 24th (local time). As Google’s parent company Alphabet and Tesla, which kicked off the big tech earnings season, reported results that fell short of market expectations the previous day, anxiety grew that the surge in tech stocks fueled by the AI craze might have been exaggerated.

On that day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, centered on blue-chip stocks, closed at 39,853.87, down 504.22 points (1.25%) from the previous trading day. The S&P 500, focused on large-cap stocks, fell 128.61 points (2.31%) to close at 5,427.13, marking the largest daily drop since December 2022. The tech-heavy Nasdaq index plummeted 654.94 points (3.64%) to close at 17,342.41, the biggest daily decline since October 2022.

Heavy selling of major tech stocks led to the sharp market decline. Alphabet dropped 5.03%, and Tesla plunged 12.33%. Investors’ disappointment was reflected as the earnings released the day before failed to justify the already elevated stock prices. Alphabet posted second-quarter revenue of $84.7 billion and earnings per share (EPS) of $1.89, both exceeding market expectations ($84.2 billion and $1.84, respectively), but YouTube advertising revenue fell short of expectations. Tesla recorded second-quarter revenue of $25.5 billion and EPS of $0.52, with EPS falling below forecasts ($24.8 billion revenue and $0.62 EPS).

The disappointing earnings from these two big tech companies heightened concerns over the valuation burden on tech stocks, which had rallied in the first half of the year due to the AI boom. Consequently, other tech stocks also showed widespread weakness. Apple fell 2.88%, Microsoft (MS) and Nvidia dropped 3.59% and 6.8%, respectively. Meta, Facebook’s parent company, declined 5.61%, and Amazon fell 2.99%.

Peter Boockvar of The Boock Report diagnosed, "Investors are finally waking up to the costs of AI," adding, "They now recognize that AI is closer to a cost than a revenue generator."

Earlier, the overly heated buying trend in big tech and the elevated earnings expectations of investors were also analyzed as causes of the day’s market correction.

Scott Rubner, a specialist at Goldman Sachs, said, "The bar for earnings from the world’s most important companies is set too high," adding, "Earnings and profit forecasts must be good."

Investors are watching the upcoming earnings reports of other Magnificent Seven companies such as MS and Apple next week, expecting these to influence the overall market trend going forward. According to market research firm FactSet, over 25% of S&P 500 companies have reported second-quarter earnings, with more than 80% beating expectations. However, given the large proportion of total profits accounted for by big tech, their earnings remain crucial.

The market also paid attention to the U.S. manufacturing activity indicator released that day. According to S&P Global, the U.S. Manufacturing Purchasing Managers’ Index (PMI) for July was 49.5. A reading below 50 indicates contraction, while above 50 indicates expansion. The index fell 2.1 points from 51.6 in June, signaling a shift to contraction in manufacturing activity after one month.

Now, investors’ focus is turning to the preliminary second-quarter Gross Domestic Product (GDP) growth rate to be released on the 25th and the June Personal Consumption Expenditures (PCE) price index to be announced on the 26th. The core PCE price index, which the Federal Reserve (Fed) closely monitors, is expected to have risen 0.1% month-over-month. The second-quarter core PCE inflation rate is likely to have remained below the Fed’s 2% target. The second-quarter GDP growth rate is forecasted at an annualized 1.9% quarter-over-quarter, which is expected to strengthen hopes for a soft landing.

The market is confident about a rate cut in September. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market fully prices in a rate cut of at least 0.25 percentage points at the Fed’s Federal Open Market Committee (FOMC) meeting in September.

U.S. Treasury yields showed mixed movements between the 2-year and 10-year notes. The 2-year Treasury yield, sensitive to monetary policy, fell 1 basis point (bp) to 4.42%, while the 10-year Treasury yield, a global bond yield benchmark, rose 4 bps to 4.28% compared to the previous trading day.

International oil prices rose. West Texas Intermediate (WTI) crude oil closed at $77.59 per barrel, up $0.63 (0.8%) from the previous day, and Brent crude, the global oil price benchmark, closed at $81.71 per barrel, up $0.70 (0.9%).