Netflix and Tesla lead Wall Street stocks lower after disappointing earnings

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Shares of Netflix and Tesla fell sharply on Thursday as the tech companies dragged down Wall Street after reporting disappointing second-quarter results overnight.

Wall Street’s benchmark S&P 500 lost 0.3% while the tech-heavy Nasdaq Composite fell 1.2%, nearing its biggest daily decline in a month.

Tesla shares plunged 6.6% after the electric car maker said its profit margins fell as a series of price cuts weighed on its profits. Netflix lost 9%, having missed sales estimates and released lower-than-expected forecasts for the third quarter.

Big tech companies have been driving much of Wall Street’s rally since the start of the year, as investors rode on the wave of artificial intelligence hype and hoped global interest rates wouldn’t rise much further.

Wall Street’s rally “has been very technology-driven and if you look at what the rest of the market has been doing, it’s been pretty flat year-to-date,” said Anthi Tsouvali, multi-asset strategist at State Street Global Markets.

“We talk about this euphoria, as we reach new heights [ . . . ] but ultimately it’s driven by a very small part of the market and that’s why it could be very volatile if the tech earnings aren’t as good as everyone expected,” she added.

Line chart of NYSE Fang+ vs. Nasdaq Composite (rebased) showing tech stocks drag Nasdaq lower as earnings disappoint

Technology selling echoed in Europe, as Taiwan Semiconductor Manufacturing Company lowered its outlook for 2023, saying enthusiasm for AI may not offset the overall slowdown in global demand.

Shares of Dutch chipmaker ASML fell 3.7% even as the company reported demand from China boosted its orders in the second quarter. ASM International fell 5.9%.

European healthcare stocks offset the decline, with shares of drugmakers Fresenius and Hikma Pharmaceuticals rising around 6% after a tornado damaged the US facility of their competitor Pfizer. The Stoxx 600 Health Care Index gained 1.8%.

The European regional Stoxx 600 ended the day up 0.4%, the French Cac 40 added 0.8% and the German Dax rose 0.6%.

Meanwhile, the number of U.S. jobless claims fell to 228,000 in the week ending July 15, the lowest level since mid-May, signaling the labor market’s continued resilience in the face of rising interest rates. Economists polled by Reuters expected the figure to rise to 242,000.

“It takes time for interest rate hikes to trickle down to the real economy, with many economists predicting a resumption of layoffs in the second half of this year,” said Tom Hopkins, portfolio manager at BRI Wealth Management.

The US Federal Reserve is widely expected to raise the federal funds rate by 0.25 percentage points next Wednesday, but weaker-than-expected inflation data last week suggests its tightening cycle may soon end.

Markets expect the European Central Bank to raise its benchmark deposit rate by the same amount to 3.75% next week, but are split on whether rates will rise beyond that following dovish remarks from policymakers earlier in the week.

“Central banks may finally be nearing the end of their current rate hike cycle, especially after some positive inflation numbers in recent days,” said Henry Allen, macro strategist at Deutsche Bank.

The trend spread to the UK in the previous session after official data showed inflation fell more than expected in June, bolstering bets that Bank of England policymakers would opt for a lower rate hike at their August meeting. London’s FTSE 100 index rose 0.8%.

Stocks fell in Asia, with China’s benchmark CSI 300 slipping 0.7%, while Hong Kong’s Hang Seng lost 0.1%.

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