Markets: News  

By Isabel Wang and Frances Yue

Nasdaq falls 2% as investors weigh results from Microsoft and Alphabet

U.S. stocks finished mostly lower on Wednesday as investors digested disappointing results from tech behemoths Microsoft and Alphabet, while reassessing the Federal Reserve's path after the Bank of Canada delivered a smaller-than-expected rate hike.

How stocks traded

The Dow's meager gain saw it stretch its winning streak to four sessions, while the S&P 500 and Nasdaq snapped a three-day string of gains.

What drove markets

Stocks saw choppy trade, with the Dow posting solid gains and the S&P erasing initial losses before both turned south to join the Nasdaq Composite in negative territory after disappointing earnings from Microsoft Corp. (MSFT) and Google parent Alphabet Inc(GOOGL)(GOOGL) late Tuesday.

The S&P 500 tech sector ended 2.2% lower, while communication services declined 4.7% to lead the way lower.

The morning bounce for stocks came after the Bank of Canada's smaller-than-expected rate rise buoyed hopes that the Federal Reserve may eventually be less aggressive in hiking rates.

Also helping to boosting the positive sentiment in the morning was the continued slide on Wednesday in bond yields and the dollar . The yield on the 10-year Treasury retreated 9.5 basis point to 4.014% from 4.109% as of Tuesday afternoon. The ICE U.S. Dollar Index, a measure of the currency against a basket of six major rivals, was down 1.1% at 109.68, as offshore Chinese yuan surged 1.8% to 7.1917 after Chinese banks were reported to sell the greenback to help drive the move.

"The U.S. dollar's near parabolic rise against major currencies has eased as data releases, including manufacturing, housing, and even the seemingly stubborn labor market, suggest the economy is slowing in response to higher interest rates," wrote Quincy Krosby, chief global strategist for LPL Financial, in a Wednesday note. "The stronger dollar has become a major headwind for S&P 500 multinationals, especially amid a backdrop of weaker global demand."

Read: U.S. dollar rally takes a breather as currency slumps versus major rivals

Speculation has mounted over the potential for the Federal Reserve to reduce the size of its rate increases in December after delivering what's expected to be another supersize 75 basis point jump when policy makers meet next week.

The Bank of Canada's decision Wednesday to raise its key overnight lending rate by 50 basis points, or half a percentage point, to 3.75%, was seen reinforcing that expectation, analysts said. Nine of 12 economists surveyed by The Wall Street Journal had forecasted a 75 basis point rise.

Fed-funds futures traders see a 89.3% probability of a 75 basis point hike by the Fed next week, according to the CME FedWatch tool. But the probability of a 75 basis point rise in December fell to 38.6% from 50.8% on Tuesday, while the probability of a 50-basis point rise rose to 55.3% from 47.4%.

"I think it's reasonable to believe that the Fed will slow (its rate hikes)," said Larry Cordisco, co-chief investment officer at Osterweis Capital Management. However, "where I think there may be too much hope in the market with people seeing the pause as sort of a way station on the way to a pivot," Cordisco said.

"I just think the Feds going to be very reluctant to pivot, even if the economy's in a bit of a recessionary period as long as inflation remains high. It's tough to see how inflation comes down rapidly to their 2% target side," Cordisco said.

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Google's parent company Alphabet reported just 6% year-over-year sales growth in its fiscal third quarter Tuesday and missed widely on its advertising revenue.

Advertising on both Google and YouTube was "a bit softer than what people wanted, even when you take into account foreign exchange headwinds," said Cordisco. "That's a sign of economy decelerating a little bit."

Microsoft Corp. shares finished 7.7% lower on Wednesday as the company's cloud-computing growth hit a sudden deceleration and executives guided for holiday-season revenue to come in more than $2 billion lower than expectations.

Attention will next turn to results from Meta (META), due after the market close, and then Apple (AAPL) and Amazon.com (AMZN) on Thursday.

In U.S. economic data, the trade deficit in goods widened 5.7% in September to $92.2 billion as a strong dollar hindered exports.

Companies in focus

--Jamie Chisholm contributed reporting

-Isabel Wang

(END) Dow Jones Newswires

October 26, 2022 16:32 ET (20:32 GMT)

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