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Shares in Netflix and Tesla fell sharply in early trade on Thursday as tech companies dragged down Wall Street after reporting disappointing second-quarter earnings overnight.
Wall Street’s benchmark S&P 500 lost 0.4 per cent, interrupting its three-day winning streak, while the tech-heavy Nasdaq Composite dropped 1.1 per cent.
Tesla shares dropped 6.2 per cent after the electric-car maker said its profit margins slipped as a series of price cuts weighed on earnings. Netflix lost 8.4 per cent, having missed sales estimates and posted lower than expected guidance for the third quarter.
Large tech companies have driven much of the rally on Wall Street since the start of the year, as investors rode the wave of artificial intelligence hype and hoped that global interest rates would not increase much further.
The Wall Street rally “was very tech-driven and if you look at what the rest of the market did, it was pretty flat since the beginning of the year”, said Anthi Tsouvali, multi-asset strategist at State Street Global Markets.
“We talk about this euphoria, because we are reaching new highs [ . . . ] but at the end of the day it’s driven by a very small part of the market and that is why it could be very volatile if tech earnings are not as good as everyone expected,” she added.
The tech sell-off echoed in Europe, as Taiwan Semiconductor Manufacturing Company lowered its outlook for 2023, saying that enthusiasm about artificial intelligence might not compensate for the overall slowdown in global demand.
Shares of Dutch chipmaker ASML slipped almost 3 per cent, even as the company reported that demand from China boosted its orders in the second quarter. ASM International was down almost 6 per cent.
Upbeat mining sector earnings offset the drop, with shares of precious metals miner Anglo American rising 4 per cent after the company reported a jump in its first-half copper production. The Stoxx 600 Basic Resources index added 1.4 per cent.
Europe’s region-wide Stoxx 600 was up 0.4 per cent, France’s Cac 40 gained 0.8 per cent and Germany’s Dax rose 0.6 per cent.
Meanwhile, the number of US applications for jobless claims unexpectedly fell to 228,000 in the week ending July 15, the lowest level since mid-May, signalling continued labour market resilience in the face of rising interest rates. Economists polled by Reuters had expected the figure to rise to 242,000.
“It takes time for interest rate hikes to filter down into the real economy, with many economists predicting lay-offs to pick up 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 lower than expected inflation data last week suggested its tightening cycle could soon end.
Markets forecast the European Central Bank will lift its benchmark deposit rate by the same amount to 3.75 per cent next week, but are divided on whether rates will increase beyond that following policymakers’ dovish remarks earlier in the week.
“Central banks might finally be near the end of their current rate-hiking cycle, particularly after some positive numbers on inflation over recent days,” said Henry Allen, macro strategist at Deutsche Bank.
The trend spilled over into the UK in the previous session, after official data showed inflation eased more than expected in June, bolstering bets that Bank of England policymakers would opt for a smaller rate increase at their August meeting. London’s FTSE 100 index rose 0.7 per cent.
Equities were down in Asia, with China’s benchmark CSI 300 index slipping 0.7 per cent, while Hong Kong’s Hang Seng lost 0.1 per cent.
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