Topline
Major stock indexes slipped to their lowest levels since May this week as the largest technology companies struggle to hold up the broader market’s gains, an issue on full display amidst the ongoing third-quarter earnings season.
Key Facts
The S&P 500 and tech-heavy Nasdaq closed Wednesday at their lowest levels since May, dipping a further 0.9% and 1.5%, respectively, by mid-afternoon Thursday.
The S&P is now nearly 10% below its July peak, just shy of 10% correction territory, and the Nasdaq is 12% lower than its July high.
The breakdown comes as the “magnificent seven” massive tech stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla—fail to support the broader 2023 rally, with those seven stocks down an average of 11% since July 31.
That group’s inability to hold up the market is on full display as a stream of firms report earnings: The seven tech behemoths are projected to grow profits 33.1% and revenue 10.9% year-over-year, according to research published Thursday by Bernstein quantitative analyst Ann Larson, dwarfing the 493 remaining S&P companies’ 8.6% profit contraction and 0.3% sales growth.
As a result of the limited breadth of growth, the S&P as a whole is forecasted to report a 3.1% dip in third-quarter profits and a 1.5% expansion in sales.
Among the 29% of all S&P companies who reported earnings through Tuesday, Q3 profits are up 2.6% and sales are up 1.2% year-over-year, according to LSEG data, largely propped up by Alphabet, Microsoft, Meta and Tesla’s average Q3 profit and revenue gains of 4% and 9%, respectively.
Crucial Quote
“Earnings are not providing the proverbial ‘ray of sunshine’ they did in Q1 or Q2,” Sevens Report analyst Tom Essaye wrote to clients Thursday. This earnings season “has not been good” and “hint at a potentially slowing economy,” Essaye noted.
Key Background
The S&P surged nearly 30% and the Nasdaq spiked almost 40% from its October 2022 low to its summer highs thanks almost entirely to a surge in the valuations of the most valuable tech stocks, earning the group the “magnificent seven” nickname as bulls hitched their wagons to the firms at the forefront of the artificial intelligence revolution. Some strategists pointed to the narrowness of the gains as a worrisome sign, and ultimately the speed bump for big tech did cause the broader market to cede much of its gains.
Surprising Fact
Despite the slowdown in earnings growth outside of big tech, companies have actually been topping analyst estimates across the board this quarter; 80% of reporting firms have topped profit estimates for Q3 through Tuesday, above the 67% historic rate, according to LSEG, indicative of companies setting a lower hurdle amid a shakier macroeconomic environment.
What To Watch For
A trio of the magnificent seven have yet to report Q3 earnings. Amazon will report Thursday afternoon, Apple on Thursday and Nvidia on November 21.
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