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Tech stocks take a tumble

market snapshot

27 October 2023 |
Tech stocks slipped this week on the back of companies reporting weaker-than-expected earnings, dragging the Nasdaq 100 Index into correction territory.

Fast reading:

  • Several big tech companies posted disappointing earnings this week, sending stock markets lower. European and Asian equities also recorded losses.
  • The US economy grew in the third quarter, as higher wages from a tight labour market encourage consumer spending.
  • Elsewhere, the ECB held interest rates steady at 4% on Thursday, with a similar decision expected at next week’s meetings for the Fed and BoE.

The Nasdaq was pulled into correction territory on Wednesday, following a steep drop in shares across several big tech firms. Google’s owner Alphabet extended the selloff later that day, with investors reacting to disappointing growth in its cloud business. It was Google’s worst-performing day since March 2020, when the Covid-19 pandemic started.

Wednesday’s tech rout interrupts an impressive rally for the sector. The buzz around artificial intelligence (AI) and its applications has supported the S&P 500 Index this year, as investors piled into big tech stocks. The ‘so-called’ magnificent seven top blue-chip US companies – made up of Apple, Meta, Amazon, Alphabet, Nvidia, Microsoft and Tesla – have powered much of this rally. However, with many of these companies posting lacklustre earnings, investors have witnessed US$200bn wiped off their market value. Of the seven, Microsoft offers the only real bright spot.

Figure 1: A good run? Tech stocks take a tumble

It’s enough, until it isn’t

Geir Lode, Head of Global Equities at Federated Hermes Limited, highlights how the latest earnings season may be an early indication of how higher interest rates in the US are affecting the broader economy.  

“Earnings season has left much to be desired as companies that, until now, have held up well against a difficult back drop begin to creak under the pressure. Good results are no longer enough for these economically sensitive stocks to gain traction as investors are concerned about a weaker macro-economic backdrop,” he says.

“A mild recession might actually benefit the wider market as this will give more impetus for interest rates to be cut, although not until mid to late 2024 at the earliest.”

Good results are no longer enough for these economically sensitive stocks to gain traction

The bigger picture

Equity stocks fell this week, with high yields raising concerns that rates may stay higher for longer. Europe’s STOXX Index was down 0.8%, just off seven-month lows of earlier in the week and the MSCI ACWI Index was down just under 1% on Thursday.

The US economy, meanwhile, grew at the fastest pace in nearly two years in the third quarter according to latest GDP data, as higher wages from a tight labour market encouraged consumer spending. GDP increased at a 4.9% annualized rate last quarter, the fastest since the end of 2021, according to the Bureau of Economic Analysis.

Figure 2: The bigger picture

Elsewhere, the European Central Bank (ECB) brought an end to its rate hike streak on Thursday, after 10 consecutive increases in borrowing costs. The deposit rate now sits at 4%, with inflation in the eurozone at half of its peak.

The central bank’s decision comes ahead of similar meetings for the US Federal Reserve (the Fed) and the Bank of England (BoE) next week, with consensus the outcome will be the same.

For further insights on global equities, please see: Global Equity ESG, H1 2023 Report.

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