The U.S. stock market ended lower on Wednesday, as disappointing earnings from some of the biggest tech companies and rising inflation concerns weighed on investor sentiment. The Dow Jones Industrial Average dropped 332.57 points, or 0.98%, to 33,665.08. The S&P 500 slid 1.34% to 4,314.60, while the Nasdaq Composite fell 1.62% to 13,314.30.
Tech giants miss expectations
The main drag on the market came from the tech sector, as several industry behemoths reported quarterly results that failed to impress Wall Street. Netflix, Tesla, Meta and Microsoft all posted earnings after the bell on Tuesday, but none of them managed to meet or beat analysts’ estimates.
Netflix reported its slowest subscriber growth in a decade, adding only 2.2 million net paid subscribers in the third quarter, well below the 3.8 million expected by analysts. The streaming giant also issued a weak guidance for the fourth quarter, projecting 8.5 million new subscribers, lower than the 9.1 million consensus estimate. Netflix shares plunged 11.6% on Wednesday, wiping out more than $30 billion in market value.
Tesla also disappointed investors with its third-quarter earnings, missing expectations on both revenue and earnings per share. The electric car maker reported revenue of $13.76 billion, below the $14.04 billion forecast by analysts. Earnings per share came in at $1.62, lower than the $1.82 expected by Wall Street. Tesla blamed supply chain issues and rising costs for its weaker-than-expected performance. Tesla shares dropped 4.9% on Wednesday.
Meta, formerly known as Facebook, also posted lower-than-expected revenue and earnings for the third quarter, as the social media giant faced regulatory scrutiny and user backlash over its impact on society. Meta reported revenue of $29.01 billion, missing the $29.57 billion expected by analysts. Earnings per share came in at $3.22, below the $3.19 forecast by Wall Street. Meta also warned that its growth could slow down in the coming quarters due to headwinds from Apple’s privacy changes and regulatory pressures. Meta shares fell 3.9% on Wednesday.
Microsoft was the only tech giant that beat expectations on both revenue and earnings for the third quarter, but its shares still declined 2% on Wednesday, as investors were not impressed by its cloud computing growth. Microsoft reported revenue of $45.32 billion, above the $43.86 billion expected by analysts. Earnings per share came in at $2.27, higher than the $2.07 forecast by Wall Street. However, Microsoft’s cloud computing segment, Azure, grew 50% year-over-year, slower than the 51% growth in the previous quarter.
Inflation fears rise as yields spike
Another factor that dragged down the market was the rising inflation fears, as the yield on the benchmark 10-year U.S. Treasury climbed to multiyear highs on Wednesday. The 10-year yield broke above 4.9% for the first time since 2007, reflecting expectations that inflation will remain elevated and force the Federal Reserve to tighten monetary policy sooner than expected.
The latest data showed that consumer prices rose 5% year-over-year in September, matching the highest level since 2008. Producer prices also surged 8% year-over-year in September, hitting a record high since data collection began in 2010.
Investors are worried that higher inflation will erode corporate profits and consumer spending power, as well as increase borrowing costs for businesses and households.
The Fed has maintained that inflation is transitory and largely driven by supply chain disruptions and pent-up demand from the pandemic recovery. However, some Fed officials have recently signaled a more hawkish stance, suggesting that the central bank could start tapering its bond-buying program as soon as November and raise interest rates next year.
Fed Chair Jerome Powell also delivered a speech at the Economic Club of New York on Tuesday, in which he acknowledged that inflation has been higher and more persistent than expected, but reiterated that it will likely moderate over time.
Outlook for the market
Despite the sell-off on Wednesday, some market strategists remain optimistic about the outlook for the stock market, citing strong fundamentals and earnings growth.
Ryan Detrick, chief market strategist at Carson Group, said that he expects earnings season to come in better than expected and provide support for the market.
“We’re hopefully going to see some continued positive strength there on the economy and what they see going forward,” he said.
“The headlines are scary, for sure,” he added. “But the fundamentals to us are pretty strong.”
Kevin Gordon, senior investment strategist at Charles Schwab, said that he believes inflation will eventually ease and allow interest rates to stabilize.
“We’re at a point in the cycle now where companies really need to start showing actual demand coming back online,” he said.
“If that’s not the case, then you’re probably not going to get as much of a lift as people were expecting.”
He also said that he favors value stocks over growth stocks in the current environment, as they tend to perform better when inflation and interest rates are rising.