NASDAQ Over 1% Lower as Weak Microsoft, Alphabet Results Fan Recession Fears

US stock market investors are bracing for a sharply lower opening on Wednesday led by a more than 1% drop in the technology-weighted NASDAQ Composite Index. The anticipated weakness is being fueled by disappointing earnings reports and warnings from Microsoft and Alphabet after the bell on Tuesday. Additionally, the news is spreading amongst other megacap companies with investors being spooked by fears of slowing economic growth.

The catalyst behind today’s anticipated weakness on the opening are dismal performances by Microsoft and Alphabet, which are both down about 6% each in premarket trading. The weakness is even spreading to other major tech-driven companies such as Amazon.com and Apple, which are scheduled to report results later this week. Both were down 3.7% and 0.9%, respectively, ahead of the opening.

“The results of the big technology firms were seen as a key determining factor in market sentiment going into the U.S. third quarter reporting season and both Microsoft and Alphabet have given investors reason to worry,” said Laith Khalaf, head of investment analysis at AJ Bell.

What Went Wrong at Alphabet?

Straight up, Alphabet missed analyst expectations on the top and bottom lines. The main reason for the misses is being attributed to a drop in revenue at YouTube, while analysts were expecting growth of about 3%. Additionally, total growth of 6% marked the weakest period of expansion since 2013, other than one period during the pandemic.

The details of the earnings report show that revenue growth slowed to 6% from 41% a year earlier as the company contends with a continued downdraft in online ad spending.

YouTube ad revenue slid about 2% to $7.07 billion from $7.21 billion a year ago. Analysts were expecting an increase of about 3%. Alphabet reported overall advertising revenue of $54.48 billion during the quarter, up slightly from the prior year.

Microsoft Beats the Street, but Poor Guidance Sinks Shares

Microsoft stock is taking a hit early Wednesday after the company reported softer cloud revenue than expected in its fiscal first quarter and gave weak quarterly guidance.

With respect to guidance, Microsoft predicts $52.35 billion to $53.35 billion in revenue for the fiscal second quarter, which implies 2% growth at the middle of the range. Analysts polled by Refinitiv had been looking for revenue of $56.05 billion.

Additionally, Microsoft’s implied operating margin for the fiscal second quarter was about 40%, narrower than the 42% consensus among analysts polled by StreetAccount.

One-Time Events or Tip of Iceberg?

Investors could extend the early losses or bounce back throughout the session, but are more than likely to hold prices in a range in anticipation of after-the-bell earnings from Meta Platforms on Wednesday. Apple and Amazon.com are both scheduled to report on October 27.

Their respective reports will be looked over closely to determine if there is a weaker trend developing or if we should anticipate only short-term weakness.