July 24 (Reuters) - The Nasdaq plummeted to a one-month low on Wednesday after Tesla and Alphabet disappointed with lackluster earnings, prompting investors to question if the Big Tech and AI-fueled 2024 equity rally was sustainable in the long run.
Tesla (TSLA.O), slumped 11%, set to lose around $83 billion in market value at current levels from Tuesday's close, if losses hold, after the EV maker reported its lowest profit margin in more than five years and missed second-quarter earnings estimates.
Google parent Alphabet (GOOGL.O), opens new tab, too, shed 4.6% despite a second-quarter earnings beat, as investors focused on an advertising growth slowdown and the company flagged high capital expenses for the year.
Tesla and Alphabet dragged the S&P 500 Communication Services (.SPLRCL), and Consumer Discretionary (.SPLRCD), sector indexes down more than 3% each.
"There was obviously nothing positive (in the results) and this market requires something to exceed expectations to keep itself going," said Tom Plumb, chief executive and portfolio manager at Plumb Funds.
Alphabet's losses underscored the high earnings bar for the so-called Magnificent Seven, a set of megacap tech stocks that have notched double- and triple-digit percentage gains so far in 2024, riding on the optimism around AI adoption and expectations of an early start to the Federal Reserve's interest-rate cuts.
"I can't help thinking (that) if the tech sector does sneeze, the whole market could catch it," said David Morrison, senior market analyst at TradeNation.
The benchmark S&P 500 dropped to a three-week low, pulled down by a 3% drop each in Apple (AAPL.O), opens new tab, Microsoft (MSFT.O), opens new tab, Amazon.com (AMZN.O), opens new tab, Meta Platforms (META.O), and Nvidia (NVDA.O), opens new tab.
The blue-chip Dow (.DJI), hit a nearly two-week low, with Visa (V.N), dropping 4% after its third-quarter revenue growth fell short of expectations.
Chary of the high valuation of these companies, market participants started shifting to underperforming sectors in mid-July.
S&P 500 stocks, on average, are trading at a 21.4 price-to-earnings ratio, compared with the historical average of 15.9, LSEG data showed. Of the index companies that have reported second-quarter earnings to date, 78.9% have beaten results estimates.
In economic data, S&P Global's flash U.S. Composite PMI Output Index showed business activity climbed to a 27-month high in July.
Friday's release of the personal consumption expenditures numbers, the U.S. Fed's preferred inflation measure, will be the week's most closely watched economic data.
Traders largely expect a 25-basis-point rate cut by September and two cuts this year, according to LSEG data.
At 11:42 a.m. ET, the Dow Jones Industrial Average (.DJI), was down 342.79 points, or 0.85%, at 40,015.30, the S&P 500 (.SPX), was down 89.56 points, or 1.61%, at 5,466.18, and the Nasdaq Composite (.IXIC), was down 459.67 points, or 2.55%, at 17,537.68.
Among others, AT&T (T.N), gained 4.9% after beating forecasts for wireless subscriber additions, while solar inverter maker Enphase Energy (ENPH.O), jumped 14.7% after a second-quarter operating profit beat.
Declining issues outnumbered advancers for a 1.60-to-1 ratio on the NYSE, and for a 1.50-to-1 ratio on the Nasdaq.
The S&P index recorded 13 new 52-week highs and six new lows, while the Nasdaq recorded 112 new highs and 66 new lows.
