Stocks struggled mightily in choppy trading but failed to stack back-to-back up days together. The global flight from risk assets once again unnerved investors, as did some mixed corporate earnings reports.
Market participants hoping for a second day of gains after Monday's global rout in risk assets were bitterly disappointed today. Treasury yields plunged amid weak demand for a $42 billion auction of 10-year notes – a move which put subsequent pressure on equities.
"The recent rally in bonds is another 'tell' that fixed-income investors are pricing in economic weakness, with a flight to safety thrown in for good measure," writes Steve Sosnick, chief strategist at Interactive Brokers.
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It also hasn't helped that recent bellwether earnings reports have failed to exceed high expectations. Investors are taking a much closer look at companies' massive capital expenditures on all things generative artificial intelligence (AI) and wondering when those investments might bear fruit. After all, one company's costs are another company's revenue.
"Earnings are a problem," Sosnick adds. "Or more specifically, investors' reaction to them is a problem. Sure, we're getting our usual high percentage of earnings per share [EPS] beats, but that's no longer sufficient. Stocks that are priced to perfection require perfection, so the slightest slip-up in revenues, EPS or guidance is enough to trip up stocks that have sustained huge rallies – especially in big tech and semiconductors."
At the closing bell, the blue chip Dow Jones Industrial Average was off 0.6% at 38,763, while the broader S&P 500 fell 0.8% to 5,199. The tech-heavy Nasdaq Composite declined 1.1% to end at 16,195.
Stocks on the move
Speaking of the market punishing stocks after earnings, there were several notable examples from Wednesday's session.
Walt Disney (DIS) stock tumbled 4.5% despite the entertainment giant beating top- and bottom-line expectations in its fiscal Q3 and raising its full-year profit forecast for a second straight quarter, now expecting earnings-per-share growth of approximately 30%, up from its previous forecast of 25% growth.
Disney, which happens to be one of analysts' top-rated Dow Jones stocks, said results were boosted by its direct-to-consumer (DTC) entertainment business, consisting of Disney+, Hulu and ESPN+, which combined to post a profit for the first time ever and one quarter ahead of the company's guidance.
True, DIS had a down day in a down market for more reasons than its earnings report. That said, long-term investors are right to take a skeptical view of the name at current levels. After all, Disney stock has been a buy-and-hold disaster.
Elsewhere, CVS Health (CVS) stock declined 3.2% after the pharmaceutical chain and healthcare benefits company reported mixed Q2 results and reduced its full-year profit forecast for a second consecutive quarter.
The company now anticipates earnings per share to arrive between $6.40 to $6.65, down from its previous forecast of at least $7.00. It's also guiding for cash flow from operations of approximately $9 billion compared to its previous forecast of at least $10.5 billion.
"The Company's guidance revision reflects continued pressure in the Health Care Benefits segment, partially offset by strong performance in the Health Services and Pharmacy & Consumer Wellness segments," CVS said.
Wall Street remains bullish on the healthcare stock. According to S&P Global Market Intelligence, the consensus analyst target price for CVS stock is $67.74, representing implied upside of more than 17% to current levels. Additionally, the consensus recommendation is Buy.
Super Micro Computer crash
Super Micro Computer (SMCI) stock plunged more than 20% after the AI server, software and infrastructure company came up short of earnings expectations for its fiscal fourth quarter.
The company also announced a 10-for-1 stock split. As we noted when Nvidia (NVDA) split its stock, stock splits are meaningless for retail investors.
More important for retail investors, SMCI results were mixed compared with analysts' expectations. As an AI stock, SMCI was priced to perfection, and yet it failed to deliver perfect results.
In a June report, Susquehanna analyst Mehdi Hosseini warned clients about the firm's "intensifying" cash burn.
"SCMI is indeed executing to the plan of 'mass customizing' AI server and rack solution, though the business model requires significant working capital commitment while the company is also committing capex to further expand capacity," wrote Hosseini, who rates the stock at Negative (the equivalent of Sell).
SMCI lost $7.1 billion in shareholder value Wednesday, or more than the entire market cap of American Airlines Group (AAL).
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