Tech stocks are taking a beating this week as they prove less resilient to the economic downturn than investors had hoped they would be.
What's Happening: Dreary earnings results from Google parent company Alphabet and Microsoft weighed down markets on Wednesday, showing how this year's $5.5 trillion selloff has not yet bottomed out. The tech-heavy Nasdaq ended the day down 2%. Then, Facebook parent company Meta Platforms reported weaker-than-expected results after the market close, sending its shares down 20% in premarket trading.
The big picture: We're in the thick of third-quarter earnings season and so far, things haven't been too bad. Major banks mostly met or beat expectations, and Netflix, which took a walloping earlier in the year, even showed a nice rebound. Markets rallied late last week into early this week on that earnings momentum.
But disappointing earnings from Big Tech stocks have the tendency to turn the broader market south thanks to their immense market value.
Beyond determining market sentiment, tech earnings also offer important clues about where the economy is heading. That's because the forward-looking, multinational industry is particularly sensitive to inflation, rising interest rates and a strong dollar.
So far, what we're seeing is rattling investors. Alphabet, Microsoft and Meta Platforms reported that a slowing global economy was battering their businesses.
Microsoft beat expectations but reported its slowest revenue growth in five years on Tuesday as rising energy costs and the strength of the US dollar cut away profits. In particular, sales growth in the cloud business -- one of the company's biggest bright spots in recent years -- was lower than analysts had hoped. Its fiscal second-quarter forecast came in short of Wall Street estimates, sending shares down 8% on Wednesday.
Alphabet, meanwhile, missed earnings expectations as ad sales slowed to their slowest rate of growth since the pandemic-induced recession. Profit has dropped 27% since last year, and the company's stock fell nearly 10% on Wednesday
Alphabet CEO Sundar Pichai warned that the company would have to be "responsive to the economic environment," indicating that cost-cutting measures like layoffs are coming.
Meta Platforms also reported an earnings-per-share miss and saw revenue slip about 4.5% from the same period last year. The company, which owns Facebook, Instagram and WhatsApp, warned Wall Street that its growth forecast for the rest of the year would be lower than previously expected and that layoffs and cost cutting were coming.
The bottom line: "Meta, Alphabet, and Microsoft should be able to deal with ups and downs in revenue growth, as long as they can remain productive," said Columbia Business School professor Dan Wang, but in the current environment "there is little evidence that these companies can maintain the same level of productivity."
Big Tech soared to new heights over the past decade as the companies enjoyed a low-interest rate, low inflation environment. That's no longer the case. These earnings signal that it won't be for some time.
Coming up: Apple and Amazon report after the market closes on Thursday.
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