Thursday morning began with hope and optimism for investors. The S&P 500 opened right near yesterday’s high, momentarily pushed through it, then reversed lower. Now investors are looking at a number of big stocks down on the day.
What’s causing the decline?
There are a few factors in play. First, it doesn’t help that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) continues to perform terribly. Yesterday, shares fell 7.7%, marking the stock’s worst decline since October. The fall came as the company’s AI-powered platform — Bard — was being shown off while clearly showing a mistake within its findings.
While not catastrophic for Alphabet’s business, it raised concerns among investors that the company is lagging behind Microsoft (NASDAQ:MSFT), OpenAI’s ChatGPT, and others in the AI arms race.
If that weren’t bad enough, the stock is down another 5% in Thursday’s session. As the third-largest company in the U.S., a two-day 12% decline will have an impact — even if it’s just on sentiment.
Further, last week’s extremely hot non-farm payrolls report seems to be lingering on investors’ minds. Will that encourage the Fed to keep up its rate-hiking rhetoric, perhaps beyond just one more 25 basis point hike? According to the Fed, it does keep the “higher for longer” approach to interest rates in play.
While that worry is present, the market is playing a game of chicken with the Fed. That’s as it prices in a rate cut by the end of the year.
Are Stocks Down on Earnings, Recession Worries?
Earnings are still a question mark right now. So far, the market has been very forgiving on earnings. Reports that are “just okay” are being met with relief rallies, while good results are being rewarded with big gains.
Even disappointing results are being shrugged off. FAANG — specifically Apple (NASDAQ:AAPL), Alphabet and Amazon (NASDAQ:AMZN) — reported disappointing quarters, and yet the stocks were bought on the dip.
Even the truly disappointing quarters, like those from Intel (NASDAQ:INTC) and Snap (NYSE:SNAP), have gotten a pass from the market. That’s as these stocks have erased all of their post-earnings losses.
That said, it’s clear that business isn’t going quite as well as investors and analysts were hoping. For now, that fact is getting a pass, but sustained weakness (and disappointments) likely won’t fly in the future.
And of course, there’s one key component that’s causing a lot of investors to scratch their heads: headcount reductions.
Disney (NYSE:DIS) was the latest big name to announce a wave of layoffs. It joins eBay (NASDAQ:EBAY), Dell (NYSE:DELL), Zoom Video (NYSE:ZM) and others that have done so over the past few days. Despite the recent layoffs listed here, it’s clear the layoffs are trickling out of tech and into other sectors as well.
While the jobs report was a blowout last month, the headcount reductions seem to be creating a recession fear among investors. The fact that the spread between the 2-year and the 10-year yields isn’t helping matters. It’s now on pace for its widest spread in four decades and is often used as a recession predictor.
The Best Explanation for Why Stocks Are Down
All of the factors above are why investors see their stocks down today. That said, one other explanation perhaps does the best job of explaining why the stock market is under pressure on Thursday.
It’s been a huge run for stocks!
Tech stocks had one of their best months in quite some time, while equities as a whole have done well. The S&P 500 has rallied about 12% in six weeks. The Nasdaq has climbed 20% amid a five-week win streak.
Despite the recent dip, the Nasdaq is up more than 13% so far for the year. While a rebound is to be expected after a terrible 2022, this type of rally has been fast and furious. It only makes sense for it to cool off a bit. Not to mention, the rise in Treasury yields and the U.S. dollar aren’t helping matters.
Put it all together and it’s a recipe for lower stock prices. The question is, will a mild dip deepen into a larger correction?
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
