Pre-market stocks: Why tech stocks are bleeding right now

What’s happening: The Nasdaq fell nearly 4% on Tuesday, sending the index to its lowest level since December 2020. The S&P 500 lost 2.8%. It is now 13% below its January peak.

“The market has fallen significantly from its peak at the start of the year and more recently has seen a steeper decline,” said Brad McMillan, chief investment officer at Commonwealth Financial Network.

Earnings: Shares of Big Tech companies soared after the 2020 stock market crash. Their companies proved resilient and investors – brimming with cash thanks to central banks’ efforts to support the economy – rushed to capitalize on their growth fast.

Now Wall Street is giving these companies another look as they doubt they can sustain the momentum needed to justify their lofty valuations. Last week, Netflix’s earnings disaster sent its shares plummeting.
Google’s parent company Alphabet (GOOGL) said on Tuesday that its first-quarter sales growth slowed to 23%, slightly below Wall Street forecasts. Alphabet’s full-year 2021 sales growth was 41%. Shares fell more than 3% ahead of Tuesday’s report and fell another 4% in premarket trading on Wednesday.

“They don’t tend to miss out on revenue, so I think that was the big shock to the markets,” Justin Onuekwusi, head of retail investments at Legal & General Investment Management, told me.

The economy sucks: The Federal Reserve is withdrawing support for the economy to fight the highest inflation in four decades. But if he is too aggressive in raising rates, he risks sending the US economy into a recession, which would further weigh on corporate earnings.

Deutsche Bank, which earlier this month became the first major bank to forecast a recession in the United States next year, said on Tuesday it now expects a “major” downturn.

In a report titled “Why the coming recession will be worse than expected,” its economists said it is “very likely that the Fed will have to put the brakes on even harder and that a deep recession will be needed to get inflation under control.” “

Growth is also slowing sharply in China, the world’s second largest economy, as the country tries to limit the spread of the coronavirus. This is bad news for the rest of the world.

“Obviously as we recover, we need Chinese demand,” Onuekwusi said.

Rates up: Yields on US bonds, which move opposite to prices, have jumped this year in anticipation of the Fed’s plan to raise interest rates. The yield on the benchmark 10-year US Treasury is now 2.76%. At the start of 2022, it was close to 1.5%.

As yields on safe debt rise, investors are beginning to rethink riskier bets on future corporate earnings. Tech stocks, in particular, are starting to look less attractive.

Look forward: Not all revenues were of concern. Microsoft (MSFT), which also reported results on Tuesday, said its revenue rose 18%. Its shares are up 4% in premarket trading. But with Facebook Meta (Facebook), Apple (AAPL) and Amazon (AMZN) still to come this week, markets should remain jittery.

“Because these stocks are getting bigger and bigger, any disappointment will have a huge impact,” Onuekwusi said.

Russia cuts natural gas supply to Poland and Bulgaria

Following Russia’s invasion of Ukraine, fears grew that Moscow could militarize the country’s energy supplies as a means of retaliation against the West for the punitive sanctions.

It is no longer a hypothesis. On Wednesday, Russia cut off natural gas supplies to Poland and Bulgaria after refusing to pay in roubles, dramatically escalating tensions.

“Energy is increasingly militarized as the war in Ukraine looks set to enter the long haul and expectations are growing that a crude oil embargo will eventually be imposed on Russia by the EU “said Susannah Streeter, an analyst at Hargreaves Lansdown.

The European Commission described the decision to halt supplies as an attempt at “blackmail” and said it was coordinating a response between EU member states.

Poland had prepared for such a move by importing more liquefied natural gas from countries like Qatar. But the development is fueling concerns that Russia could hit Germany by shutting down gas flows through the crucial Nord Stream pipeline.

Germany has warned it will plunge into a deep recession if its supply of Russian natural gas is suddenly cut off, losing $234 billion in economic output over the next two years and hundreds of thousands of jobs.

Investor perspective: Natural gas prices in Europe soared on the news, rising more than 20% early Wednesday before falling back.

Equities in Europe largely ignored the development, but the euro fell. Against a strong US dollar, it fell below $1.06 for the first time in five years.

Tesla shares just plunged. This is bad news for Musk

In yesterday’s edition of Before the Bell, we highlighted how Elon Musk’s deal to buy Twitter posed a risk to You’re here (TSLA) shares.

It didn’t take long for investors to indicate they were shaken. Tesla’s stock plunged 12% on Tuesday, marking its worst day since September 2020. The drop erased $126 billion from the company’s market value.

Remember: Musk has secured over $25 billion in debt financing from banks, including Morgan Stanley. But he still has to put in about $21 billion on his own.

Most of Musk’s wealth is tied to Tesla stock. It raised questions about whether he could offload some of his 17% stake to raise money.

It’s also unclear how involved Musk will be on Twitter. Could he be overstretched, leaving him with less time to focus on running the world’s most valuable automaker?

It may take some time for investors to sort through these unknowns. But their unease puts pressure on Musk, who has used his Tesla holdings as collateral for some of the loans he has received. As the value of his stake drops, he has less wiggle room, which could be a problem as bankers and lawyers scramble to close the deal.

Following

Boeing (BA), Harley-Davidson (PORK), Kraft-Heinz (KHC)Steve Madden and Spotify (PLACE) publish the results before the opening of the American markets. Meta, Ford (F), Hertz (HTZ), Mattel (RUG), PayPal (PYPL) and Qualcomm (COMQ) follow after the close.

Coming tomorrow: Apple and Amazon wrap up Big Tech earnings.