Nasdaq enters a correction as tech shares lead U.S. stocks lower

U.S. stock indexes ended sharply lower Wednesday afternoon, led by a slide in technology shares after behemoths Alphabet and Microsoft delivered a mixed picture of earnings. Longer-dated Treasury yields also resumed their march higher ahead of inflation data on Friday and interest-rate decisions by the Federal Reserve next week.

How stocks traded

  • The Dow Jones Industrial Average
    shed 105.45 points or 0.3% to close at 33,035.93 and has fallen for five of the past six trading days.

  • The S&P 500
    eased 60.91 points or 1.4% to finish at 4,186.77, the largest one day point and percentage decline since Tuesday, September 26, 2023.

  • The Nasdaq Composite
    fell 318.65 points or 2.4% to 12,821.22, entering a corrective territory. The index is 10.7% lower from a local high at 14,358.02 hit on July 19, 2023, according to Dow Jones market data. The index saw its largest one day percentage decline since Tuesday, February 21, 2023.

On Tuesday, the Dow industrials rose 204.97 points or 0.6% to close at 33141.38, the S&P 500 increased 30.64 points or 0.7% to end at 4247.68, while the Nasdaq gained 121.55 points or 0.9% to finish at 13139.87.

What drove markets

Technology stocks were under pressure on Wednesday after Google-parent Alphabet Inc. 

reported its third-quarter earnings which showed a disappointing performance for its cloud-computing business, sending the company’s stock down 9.5%, its worst one-day performance since March, 2020.

The S&P 500 communication services sector
which includes high-profile names as Alphabet, Meta Platforms
and Netflix
slumped 5.9% on Wednesday, according to FactSet data.

Alphabet Inc.’s disappointing earnings outweighed optimism about Microsoft Corp.’s results
which surprised investors with 28% constant-currency growth in its Azure cloud-computing business, above the company’s own forecast and the analysts’ projection.

With nearly a quarter of S&P 500 index companies having reported results, 81.4% of those beat analyst expectations, notably better than the 67% of beats in a typical quarter since 1994, according to data from LSEG.

Tim Urbanowicz, head of research and investment strategy at Innovator ETFs, said despite good news so far in the third-quarter earnings season, investors need to back up and remember they are in a macro driven market. “A lot of the earnings news will take a backseat to the economic data,” he said in emailed comments on Wednesday.

“What we have seen historically is that interest-rate hikes impact earnings with about a two-year lag,” Urbanowicz noted. “Very consistently, one thing we have noticed is that earnings have never bottomed out before the Fed has finished its hike cycle.”

That is why rising U.S. Treasury yields are still weighing on the market sentiment this week, with the yield on the 10-year Treasury 
up 11.2 basis points to 4.952% on Wednesday. Earlier this week, the benchmark 10-year rate traded above 5% for the first time in 16 years.

“With bond yields coming back up, people are uncertain about whether bond yields are going to take a pause here or go higher,” said Phillip Colmar, managing partner and global strategist at MRB Partners. That’s why investors are taking some profits off of tech stocks, which went up the most this year, Colmar said in a call.

“That’s where you’re seeing the most valuation compression today,” Colmar added.

It also weighed on the sentiment that an auction of five-year Treasury notes saw poor demand on Wednesday. Investors will be paying a lot more attention than they used to on Treasury auction results in the next month or two, to gauge if there is a supply and demand imbalance in bond market, according to Scott Ladner, chief investment officer at Horizon Investments.

Companies releasing their results on Wednesday included Boeing
and General Dynamics
before Wall Street’s opening bell, followed by Meta Platforms
and ServiceNow
after the close.

In economic data, U.S. new-home sales rose 12.3% to an annual rate of 759,000 in September, from a revised 676,000 in the prior month, the Commerce Department reported Wednesday. The pace exceeded expectations on Wall Street. Economists had forecast new-home sales to total 680,000 in September.

In U.S. political news Wednesday, the U.S. House of Representatives elected Rep. Mike Johnson as a new speaker on Wednesday, after failed bids this month by three other GOP lawmakers. The chamber in early October voted for the historic ouster of former Speaker Kevin McCarthy, a California Republican, over that he helped solidify a temporary deal to thwart a government shutdown.

Read:Mike Johnson elected speaker, ending rudderless period for House

Companies in focus

  • Texas Instruments Inc.
    closed 3.5% lower after the company missed quarterly forecasts and guided to earnings below Wal5l Street estimates.

  • Boeing Co
    fell 2.5% on Wednesday after the aerospace and defense giant reported a wider-than-expected loss but topped revenue expectations and affirmed the full-year outlook for free cash flow.

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