Weak third-quarter results from Microsoft and Google parent Alphabet weighed on US markets on Wednesday, after the big tech groups warned of weakness in crucial business lines that investors had hoped would be resilient to an economic slowdown.
Alphabet closed down 9.1 per cent, while Microsoft finished 7.7 per cent lower. Both suffered their worst one-day declines since early in the coronavirus pandemic in March 2020.
The weak reports dragged the tech-dominated Nasdaq Composite down 2 per cent, while the broader S&P 500 slid 0.7 per cent in choppy trading.
Ted Mortonson, a tech sector strategist at Baird, said almost every part of the tech industry faced a difficult combination of pressures including a stronger dollar, falling consumer demand, weakness in Europe and Asia, rising interest rates and geopolitical tensions including US restrictions on the Chinese semiconductor industry.
“We’ve got a concoction of ingredients that we haven’t [previously] seen all combined at once,” Mortonson said.
Alphabet’s results, published after markets closed on Tuesday evening, showed a sharp slowdown in growth in its core search advertising business. Smaller rival Snap warned last week about advertising challenges, but many investors had hoped Google’s business would be less vulnerable to an economic downturn.
Facebook owner Meta dropped 5.6 per cent during regular trading on Wednesday, but its shares shed a further 12 per cent after the closing bell as it reported a decline in third-quarter revenue.
Microsoft, meanwhile, said it expected growth in its cloud computing business — which investors had been counting on to offset weakness in the PC market — would slow in the fourth quarter.
Elsewhere on Wednesday, prices on US government bonds rallied as investors continued to scale back expectations for how far the Federal Reserve will raise interest rates. Futures markets were pricing in a peak rate of 4.86 per cent in May, down from 5 per cent last Thursday.
A smaller-than-expected rate rise from the Bank of Canada, and comments from governor Tiff Macklem that the central bank is approaching the end of its monetary tightening cycle, added to views policymakers might soon dial back their aggressive fight against inflation.
The yield on the benchmark 10-year US Treasury, which falls when prices rise, dropped 0.1 percentage points to 4.01 per cent.
The dollar softened 1.1 per cent against a basket of six peers, taking the US currency back to levels last seen in late September. The euro climbed back above $1 for the first time in a month.
Chris Turner, global head of markets at ING, attributed the dollar’s recent moves less to “any kind of de-rating” of the US economy and more to investors hunting for bargains in other countries.
In Europe, the regional Stoxx Europe 600 index reversed earlier losses, rising 0.6 per cent. The moves came as Deutsche Bank, the country’s largest lender, reported its highest third-quarter pre-tax profit since before the financial crisis, thanks in part to rising interest rates.
The European Central Bank will meet on Thursday and is expected to raise borrowing costs by 0.75 percentage points for the second month in a row, to 1.5 per cent, to tame inflation that hit 10 per cent in the year to September.
Gergely Majoros, a member of the investment committee at Carmignac, said falling prices for natural gas in Europe and hopes that the Fed and ECB might begin raising rates at a slower pace in the fourth quarter and into the new year meant investors’ “short- term fears have abated quite a lot”.
London’s FTSE 100 index climbed 0.6 per cent on Wednesday, while yields on 10-year gilts lost 0.06 percentage points to 3.57 per cent.
Shares in Asia advanced after sharp declines for Chinese tech stocks in the previous session. Hong Kong’s Hang Seng closed 1 per cent higher and Japan’s Topix was up 0.6 per cent.