Stocks struggled despite a strong kick-off to mega-cap tech earnings season, as a solid reading on third-quarter economic growth and softer inflation data led market participants to trim their rate-cut bets.
Although Google parent Alphabet (GOOGL) took the spotlight on the earnings calendar after printing strong results the night before – and Microsoft (MSFT) and Meta Platforms (META) results were on tap after the bell – macroeconomic news set the tone for Wednesday's session.
Economic news in focus
Real gross domestic product (GDP) increased at an annual rate of 2.8% in the third quarter, according to the advance estimate provided by the U.S. Bureau of Economic Analysis. Economists were looking for the economy to expand at a 2.9% annualized rate, but the backward-looking miss didn't phase market participants.
"The slight undershoot in GDP probably is due to a slightly bigger-than-expected drag from the volatile net trade and inventory components," wrote Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. "The strong headline growth number was, once again, underpinned by a solid increase in consumers' spending, which grew by 3.7%, the fastest pace in over a year."
Most importantly, a closely watched measure of underlying inflation continued to trend toward the Federal Reserve's 2% target, experts said. "These inflation declines were very close to expectations and shouldn't be a barrier for the Fed to gradually cut rates in November," wrote Scott Anderson, chief U.S. economist at BMO Capital Markets.
In other economic news, the ADP National Employment Report revealed that private employers added 233,000 jobs in October, the most since July 2023.
"Job growth was surprisingly solid in October despite Hurricanes Helene and Milton wreaking havoc in the Southeast and the impacts of the Boeing and dock workers strikes," Comerica Chief Economist Bill Adams wrote in a note to clients.
The ADP data, which some economists dismiss as a public relations exercise, precedes the release of the next jobs report. The nonfarm payrolls data are sure to inform the Federal Reserve's thinking as it prepares for the next Fed meeting.
"As much as the U.S. labor market continues to cool, it remains in decent shape," notes Nicolas Colas and Jessica Rabe, co-founders of DataTrek Research. "This is overall bullish for U.S. equities as some weakness allows the Fed to keep cutting rates, but an overall decent jobs market supports corporate profits."
Elsewhere, pending home sales increased 7.4% in September, with growth in all four regions month over month, according to the National Association of Realtors.
"The larger-than-expected increase was due to strong increases across all four regions of the U.S.," said Eugenio Alemán, chief economist at Raymond James. Lower mortgage rates and higher inventory drove the largest month-over-month increase in pending home sales since August 2020, the economist added, a trend he expects to continue "as the Fed cuts interest rates over the next twelve months."
Wednesday's economic news dashed hopes for an accelerated pace of rate cuts, in turn helping put a damper on equities. At the closing bell, the blue chip Dow Jones Industrial Average slipped 0.2% to 42,141, while the broader S&P 500 fell 0.3% to 5,813. The tech-heavy Nasdaq Composite lost 0.6% to end at 18,607.
Stocks on the move
Advanced Micro Devices (AMD) stock sank 10.6% after the semiconductor company met or beat expectations for its third quarter but its fourth-quarter outlook failed to impress.
AMD said it anticipates Q4 revenue of approximately $7.5 billion, plus or minus $300 million, which was in-line with analysts' expectations of $7.54 billion.
"AMD's stock was priced for a beat and raise," Summit Insights analyst Kinngai Chan told Reuters. "Clearly, AMD's outlook was not good enough for investors."
Reddit (RDDT) stock rallied 42% after the social media company beat top- and bottom-line expectations for its third quarter, which included a surprise profit, and issued guidance on the fourth quarter that also beat expectations.
For the third quarter, Reddit anticipates revenue of $385 million to $400 million, well ahead of analysts' expectations for revenue of $357.9 million.
"In the near term, historically, Q4 has been our largest revenue quarter of the year," said Reddit Chief Financial Officer Andrew Vallero on the company's conference call. "So we're focused on execution. Medium and longer term, Reddit is scaling profitably."
GOOGL stock pops in a down market
Alphabet gained 2.8% after the Magnificent 7 stock beat top- and bottom-line expectations for its third quarter. The revenue increase was fueled by its Google Cloud unit.
Google Cloud reported 35% sales growth to $11.4 billion, driven by accelerated growth in the Google Cloud Platform, which includes the company's AI infrastructure, generative AI products and core cloud services.
Meanwhile, total advertising revenue increased 10.4% year over year to $65.9 billion, including 12.2% growth at YouTube to $8.9 billion.
"GOOGL is our top large-cap stock pick for 2024, owing to a strong macro backdrop, falling interest rates, record political ad spending, data advantages, and Generative AI integrations," said Needham analyst Laura Martin, who rates shares at Buy.
Google stock added $62 billion in market cap Wednesday, or more than the entire market value of Travelers (TRV), a Dow Jones stock. But then long-term shareholders are used to such outsized rewards by now. Indeed, GOOGL stock is among the top wealth creators of all time.
To put it another way, anyone who invested $1,000 in Google stock 20 years ago would be very happy with their market-crushing returns today.
