Wall Street sinks sharply as Google parent Alphabet slumps 10pc; Microsoft an outlier

Big Tech stocks were taking the heaviest losses. Photo / Michael Nagle, Bloomberg

Wall Street is sinking sharply on Wednesday, back to where it was in May, after rising bond yields tightened their chokehold on the stock market and some of the most influential companies turned in mixed profit reports.

The S&P 500 was 1.5 per cent lower in late trading and on track for its eighth loss in the past 10 days. The Dow Jones Industrial Average was down 117 points, or 0.4 per cent, with less than an hour remaining in trading.

Big Tech stocks were taking the heaviest losses, and the Nasdaq composite was sinking 2.5 per cent, close to its worst drop of the year.

Microsoft was an outlier and rose 2.9 per cent after reporting stronger September profit (up 27 per cent to US$22.7 billion) and revenue (up 13 per cent to US$56.52b than analysts expected. The firm has invested more than US$13b in ChatGPT maker OpenAI. CEO Satya Nadella said Microsoft is “rapidly infusing AI across every layer of the tech stack” to drive productivity gains for customers.

But Alphabet was tugging the market lower even though the parent company of Google and YouTube also reported stronger profit than expected (Alphabet’s total September quarter revenue rose 11 per cent from a year ago to US$76.69b as profit jumped 42 per cent to US$19.7b, underpinned by cost cuts that have trimmed more than 7800 employees this year).

Its stock fell 9.6 per cent on worries about a slowdown in growth for its cloud-computing business. Microsoft was simultaneously reporting stronger results in its own cloud operations (where revenue jumped 19 per cent to US$24.6b), stoking worries that Google may be losing ground in a battleground that is expected to become even more important as AI progresses.

Alphabet is another one of Wall Street’s biggest companies and, like Microsoft, a member of the “Magnificent Seven” group of Big Tech stocks that’s accounted for a disproportionate amount of the S&P 500′s gain this year. The Dow was holding up better than other indexes because it includes Microsoft but not Alphabet.

Also putting heavy pressure on the overall stock market was a rise in Treasury yields. The 10-year yield climbed to 4.95 per cent from 4.82 per cent late on Tuesday, which helped to send the large majority of stocks on Wall Street lower.

Rapidly rising yields have been knocking the stock market lower since the summer. The 10-year yield has been catching up to the Federal Reserve’s main interest rate, which is above 5.25 per cent and at its highest level since 2001 as the central bank tries to get inflation under control.

The 10-year yield earlier this week hit its highest level above 5 per cent since 2007, and high yields knock down prices for stocks and other investments while slowing the overall economy and adding pressure to the financial system.

High yields tend to most hurt stocks seen as very expensive or those forcing their investors to wait the longest for big growth. That puts the spotlight on internet-related, technology and other high-growth stocks. Besides Alphabet, sharp drops for Apple, Nvidia and Amazon were the heaviest weights on the S&P 500.

Many investors have been hoping the Fed will soon cut rates to allow the system more oxygen. But they’ve had to consistently push out such predictions with each successive report on the job market that’s come in remarkably solid. Such strength has kept the economy out of a recession but could also be adding upward pressure on inflation.

Investors banking on rate cuts may be depending on a playbook that’s become obsolete, said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments. He said that may be pushing them to not take seriously enough the possibility of a global recession, which would be the result of rates left too high for too long.

For more than 40 years, the Fed has come to the rescue of markets and the economy whenever trouble arose by quickly cutting interest rates. That’s because high inflation was not a problem.

But now, with the trend of globalisation retreating and other long-term swings pushing upward on inflation, VanCronkhite said the Fed has to worry about more than just propping up the job market.

“I think the market is still believing the US Fed are a series of magicians with crystal balls that will see the problem beforehand and solve it before it becomes too serious,” he said. “I believe the Fed is under a new paradigm and will be slower to react.”

“Their focus is going to be on inflation first, economy second, in my mind. As a result, I don’t think they’ll respond quickly. In fact, I think the Fed wants a recession.”

High rates and yields have already inflicted pain on the housing market, where mortgage rates have jumped to their highest levels since 2000. The Fed’s hope is to restrain the economy enough to cool off inflation, but not so much that it creates a deep recession.

A report on Wednesday morning said sales of new homes were stronger in September than economists expected, potentially complicating things for the Fed.

Sales of new homes have been mostly recovering since hitting a bottom in the summer of 2022, with a dearth of previously occupied homes for sale pushing buyers toward new construction.

In the oil market, crude prices climbed to recover some of their sharp losses from earlier in the week. A barrel of US crude rose US$1.65 to settle at US$85.39. Brent crude, the international standard, jumped US$2.06 to US$90.13 per barrel.

US oil had been above US$93 last month, and it’s bounced up and down since then amid concerns that the latest Israel-Hamas war could lead to disruptions in supplies from Iran or other big oil-producing countries.

In stock markets abroad, indexes were modestly higher across most of Europe and Asia.