Alphabet and Tesla’s Disappointing Earnings Send Stocks Tumbling, Raising Concerns About the Economy’s Future 👀
Market Mayhem 📉
The stock market took a beating on Wednesday, with the Nasdaq Composite (^IXIC) leading the losses with a 3.6% decline, its worst day since October 2022. The S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) also fell, with the S&P 500 experiencing its worst day in over a year. This sell-off was largely driven by tech, with the “Magnificent 7” tech stocks, including Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL, GOOG), Meta (META), Nvidia (NVDA), and Microsoft (MSFT), losing over $750 billion in market cap on Wednesday, the most on record for the group. According to a report by CNBC, this was the worst day for the tech-heavy Nasdaq since the pandemic-induced sell-off in March 2020.
Tech Stocks Take a Hit 💻
Tesla (TSLA) was particularly hard hit, with its stock price falling over 12% after its quarterly earnings report fell short of expectations. This was despite the company’s revenue beating estimates, with CEO Elon Musk citing challenges in the global supply chain and production delays. According to a report by Bloomberg, Tesla’s stock has been under pressure in recent weeks due to concerns over the company’s ability to meet its production targets and the impact of rising raw material costs on its margins. The decline in Tesla’s stock price was also driven by a broader sell-off in the tech sector, with investors rotating out of high-growth stocks and into more defensive areas of the market.
Chip Stocks Struggle 📊
Chip stocks also took a hit, with Nvidia (NVDA) falling almost 7% and Broadcom (AVGO) and Arm (ARM) each dropping about 8%. This was driven by concerns over the outlook for the semiconductor industry, with investors worried about the impact of rising inventories and falling demand on chipmakers’ profits. According to a report by The Wall Street Journal, the chip industry is facing a perfect storm of challenges, including a slowdown in demand from smartphone makers, a glut of inventory, and rising competition from Chinese chipmakers.
Economic Data 📊
In economic news, fresh data from S&P Global showed that business activity in the US grew at its fastest pace in more than two years. This was driven by a surge in new orders and a rebound in employment, with the report suggesting that the economy is gaining momentum despite concerns over inflation and supply chain disruptions. Next up are Thursday’s second-quarter GDP print and Friday’s key release on June PCE inflation, the report favored by the Federal Reserve. According to a report by Reuters, economists are expecting GDP growth to slow in the second quarter, with the median forecast calling for a 2.1% annualized rate of growth.
Fed Watch 🕰️
Former New York Federal Reserve president Bill Dudley is calling for the Fed to cut interest rates now, citing declining pandemic-era savings among non-wealthy consumers and a deteriorating labor market picture. Dudley argues that the Fed’s efforts to cool the economy are having a visible effect, and that the recent increase in the unemployment rate could be a point of concern. According to a report by Bloomberg, Dudley is not alone in his call for rate cuts, with a growing number of economists and investors expecting the Fed to ease monetary policy in the coming months.
Rate Cut Expectations 📊
Markets are pricing in a nearly 100% chance that the Federal Reserve will cut interest rates at its September meeting, according to data from the CME Group. This is up from about a 68% chance just one month ago. Cooler readings on inflation and an uptick in the unemployment rate have helped fuel a narrative that the central bank should cut rates sooner rather than later.
Volatility Spikes ⚠️
The CBOE Volatility Index (VIX) shot to its highest level since April amid a broader market sell-off on Wednesday. This was driven by a surge in demand for options contracts, with investors seeking to hedge against further losses in the market. According to a report by CNBC, the VIX is often referred to as the “fear index” because it tends to rise when investors are fearful about the market’s prospects. As DataTrek co-founder Nicholas Colas recently highlighted, low volatility is typically a feature of bull markets, but sell-offs still come in bull markets and often coincide with volatility spikes.
Investment Strategy 📈
Colas suggests waiting for the VIX to close between 19.2 and 21.7, around its long-run average of 19.5, before looking for an entry point in US large caps. If investors believe markets are in for a rougher than usual slog, then the VIX level to watch is 27, one standard deviation above the long-run mean. According to a report by Yahoo Finance, Colas notes that the last 12 months of history suggest waiting for the VIX to hit a close of 19.2-21.7 before looking for an entry point in US large caps. This is because the VIX tends to mean-revert over time, and buying during periods of high volatility can be a profitable strategy.
Economic Outlook 📊
The recent sell-off in the market has raised concerns about the economic outlook, with investors worried about the impact of rising interest rates and inflation on growth. According to a report by the Wall Street Journal, the Federal Reserve is expected to raise interest rates by 0.5 percentage point at its next meeting, which could further slow down the economy. However, some economists believe that the economy is still growing strongly, and that the recent slowdown is just a blip on the radar. According to a report by Bloomberg, the economy is still expected to grow at a 2% annualized rate in the second half of the year, despite the recent slowdown.
In conclusion, the stock market took a beating on Wednesday, with the Nasdaq Composite leading the losses. The sell-off was driven by a combination of factors, including concerns over the outlook for tech stocks, rising interest rates, and inflation. However, some investors believe that the market is due for a rebound, and that the recent sell-off presents a buying opportunity. As always, it’s important to do your own research and consider your own risk tolerance before making any investment decisions.
