The S&P 500 and Nasdaq hit multi-week lows on Wednesday as disappointing earnings from Tesla and Alphabet led investors to question the sustainability of the 2024 equity rally, which has been driven by Big Tech and AI.
As the first of the “Magnificent Seven” stocks to report quarterly results, investors were keen to see if high valuations were justified. Given the significant influence of these seven companies on the market, their performance was expected to have broader implications.
Alphabet, the parent company of Google, fell by 4.9% despite beating second-quarter earnings expectations. Investors were concerned about a slowdown in advertising growth and the company’s high capital expenses for the year.
“There was obviously nothing positive (in the results), and this market requires something to exceed expectations to keep itself going,” said Tom Plumb, chief executive and portfolio manager at Plumb Funds.
Alphabet’s losses highlighted the high expectations for the “Magnificent Seven,” a group of mega-cap tech stocks that have seen significant gains in 2024 due to optimism around AI adoption and anticipated early interest rate cuts from the Federal Reserve.
Wary of the high valuations of these companies, investors began shifting to underperforming sectors in mid-July.
S&P 500 stocks are trading at an average price-to-earnings ratio of 21.4, compared to the historical average of 15.9, according to LSEG data. Of the index companies that have reported second-quarter earnings so far, 78.9% have exceeded estimates.
A shift into smaller-cap stocks has also been noted, although they were not immune to the effects of the megacaps’ performance: the Russell 2000 was down 0.5%.
