Big Tech Pullback Sends Wall Street Lower

Tech giants weigh down US markets as Nvidia earnings disappoint.

Wall Street stocks closed lower on Wednesday, with a slump in big tech companies overshadowing gains elsewhere. The S&P 500 fell by 0.6%, burdened by losses for Nvidia, Apple, Microsoft, and Amazon. Notably, about 56% of the benchmark index's constituents finished in the red. Tech companies, often with sizeable valuations, have a considerable influence on the index's performance.

The Dow Jones Industrial Average, after two consecutive record highs, dipped by 0.4%. The Nasdaq Composite, heavily weighted towards technology stocks, closed 1.1% lower.

This sell-off occurred ahead of eagerly awaited earnings from semiconductor giant Nvidia, whose chips power AI applications. Nvidia holds immense sway on Wall Street, with a market capitalisation exceeding £2.4 trillion. While the company reported second-quarter earnings and revenue exceeding analysts' expectations, the stock slumped by 3.7% in after-hours trading. During the regular session, Nvidia shares fell by 2.1%. Despite these losses, the stock remains up 153% for the year.

Nvidia is one of several companies that have benefited from the surge in enthusiasm surrounding artificial intelligence developments. This enthusiasm has been a significant driver of broader market gains over the past year.

The market's pullback ahead of Nvidia's earnings release may have been partly fuelled by news concerning Super Micro Computer, another AI-linked company. The server technology company's stock plummeted by 19.1%, registering the largest decline among S&P 500 components after announcing it would delay its annual report filing.

“The Super Micro story, I think, has people on edge because they're so directly linked to the AI theme,” commented Ross Mayfield, investment strategist at Baird.

Investors also digested a mixed bag of earnings and corporate financial updates from other companies on Wednesday. Nordstrom rose 4.2% after exceeding analysts' earnings expectations and revising its financial forecasts for the year upwards. Rival Kohl's followed suit, increasing by 0.3% after surpassing earnings projections.

However, PVH, owner of the Calvin Klein and Tommy Hilfiger brands, fell 6.4% after issuing a revenue forecast below analysts' expectations. Food producer J.M. Smucker also saw losses, dropping 4.9% after trimming its earnings forecast for the year.

Overall, the S&P 500 closed at 5,592.18, down 33.62 points. The Dow fell 159.08 points to 41,091.42, while the Nasdaq dropped 198.79 points to 17,556.03.

The latest results from retailers and other companies come as Wall Street and the Federal Reserve attempt to gauge the resilience of US consumers amidst the strain of inflation and high interest rates. These updates from clothing retailers, food producers, and others can shed light on consumer spending patterns and preferences.

Investors are also looking ahead to Friday, when the US government will release its latest inflation data with the PCE (Personal Consumption Expenditures) report for July. The hope is that the data will demonstrate further easing or at least stagnation of inflation, allowing the Fed to proceed with interest rate cuts at their September meeting, as they have strongly hinted.

Economists expect the PCE, the Fed's preferred inflation gauge, to show inflation edging up to 2.6% in July from 2.5% in June. This is a significant decline from the peak of 7.1% recorded in mid-2022. The inflation rate has been steadily declining towards the central bank's target of 2% since then, following the Fed's aggressive interest rate hikes.

Traders anticipate the central bank to begin reducing its benchmark interest rate from its two-decade high at their next meeting in September, with potential cuts totalling 1% by year's end.

These expectations for interest rate cuts are supported by reports on retail sales, employment, and consumer confidence, all pointing to a robust economy. This has bolstered confidence that the Fed can tame inflation without triggering a recession.

“Economic fundamentals continue to point to sustainable disinflation," stated Gregory Daco, chief economist at EY.

In the bond market, Treasury yields exhibited mixed movement. The yield on the 10-year Treasury climbed to 3.84%, up from 3.83% on Tuesday.

Meanwhile, investor Warren Buffett's Berkshire Hathaway offloaded a significant portion of its Bank of America stake, selling nearly 25 million shares worth almost £800 million over the past week. Berkshire Hathaway's Class A stock, already the most expensive on Wall Street, gained enough ground to elevate the conglomerate into the club of companies valued at over £800 billion. This makes it the sole company outside of the technology-related "Magnificent Seven" to achieve this distinction.

Berkshire's Class A shares closed at £589,722.02, up £3,465.22, or 0.6%.

Elsewhere, markets mostly trended lower in Europe and showed mixed performance in Asia.

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Yuri Kageyama, Matt Ott, and Josh Funk contributed to this report.