Nasdaq drops more than 2% after Netflix and Tesla results disappoint

The Nasdaq Composite had its biggest one-day drop in more than four months as investor disappointment with results from Netflix and Tesla called into question the strong, months-long rally in the tech sector.

The tech-heavy Nasdaq Composite dropped 2.1 per cent on Thursday, its biggest daily decline since March 9. Wall Street’s benchmark S&P 500 sank 0.7 per cent.

Tesla shares plunged 9.7 per cent, its biggest single-day drop since early January, after the electric car maker said on Wednesday its profit margins slipped as a series of price cuts aimed at boosting sales weighed on earnings.

Netflix lost 8.4 per cent, having missed sales estimates and posting lower than expected guidance for the third quarter. It was the stock’s biggest one-day drop since December 2022.

Large tech companies have underpinned much of the rally on Wall Street since the start of the year, as investors have ridden the wave of artificial intelligence hype. There have also been expectations 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.

Feeding in to the tech sector jitters, Taiwan Semiconductor Manufacturing Company lowered its outlook for 2023, saying enthusiasm about AI might not compensate for the overall slowdown in global demand.

Shares of Dutch chipmaker ASML slipped 4.9 per cent, even as the company reported demand from China boosted its orders in the second quarter.

Europe’s region-wide Stoxx 600 ended the day 0.4 per cent higher, France’s Cac 40 added 0.8 per cent and Germany’s Dax rose 0.6 per cent.

Meanwhile, the number of US applications for jobless claims 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 reach 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.

Following the jobless figures, the benchmark 10-year Treasury yield, which moves with inflation and growth expectations, rose 0.10 percentage points to 3.84 per cent. The two-year yield, which moves with interest rate expectations, rose 0.07 percentage points to 4.82 per cent.

The US Federal Reserve is widely expected to raise the federal funds rate by 0.25 percentage points on Wednesday, although lower than expected inflation data last week suggested its tightening cycle could soon end.

Markets forecast the European Central Bank will next week lift its benchmark deposit rate by the same amount to 3.75 per cent, 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.

Written by: Kate Duguid in New York and Daria Mosolova in London

© Financial Times