Tech stocks slide on Wall St as shrinking Cisco margins revive AI fears

Stocks on Wall Street resumed their downward spiral with tech stocks rattled after Cisco Systems’ swelling demand from artificial intelligence hyperscalers was overshadowed by its shrinking margins from more expensive memory chips, with ecommerce giant Amazon poised to face its longest losing streak since 2019.

Restaurant chain McDonald’s was one of the highlights of the day after posting stronger-than-expected December quarter sales as its push of value deals paid off, while fellow stalwarts Walmart and Coca-Cola Co joined it at the top of the Dow Jones Industrial Average’s leaderboard.

Alphabet was the only one of the Magnificent 7 megacap stocks to gain on the day, with the Google-parent shrugging off reports of a fresh antitrust probe into its search engine advertising by the European Union.

And that subdued tone is set to continue into the antipodes, with Australian futures pointing to a soft start for the S&P/ASX 200 index, with Westpac Banking Corp due to provide a quarterly update, while South Port New Zealand will report its first-half result on this side of the Tasman.

Nervous times

Stocks on Wall Street were broadly weaker, with the Dow Jones Industrial Average and S&P 500 both down 1.3% in late trading, while the tech-heavy Nasdaq Composite dropped 1.8%.

Cisco Systems sank 12% with investors spooked by the network equipment maker’s shrinking margins on more expensive memory chips, shrugging off the growing demand for the firm’s products by AI equipment makers.

Six of the Magnificent 7 megacap stocks declined, with Amazon on track for its eighth decline in a row, which would be its longest losing streak since 2019.

Alphabet gained as it shrugged off reports that the EU has launched a fresh antitrust probe into its Google advertising over concerns the search engine is inflating prices of its ad auctions.

The downcast tone meant even a strong result from mobile advertising firm AppLovin failed to win over investors, with the firm’s shares sinking 17% in late trading.

Companies operating in the physical world fared better, with Walmart posting the biggest gain on the Dow, while McDonald’s advanced 2.4% after the restaurant chain’s December quarter sales beat expectations as the fast-food operator’s value deals found success with consumers. Coca-Cola was another at the top of the leaderboard, while Crocs jumped 21% as its decline in sales was smaller than expected, with new products – including a fur-lined clog – were well-received.

“The scene was set with Cisco Systems recording strong revenue growth due to AI, but its stock price showed a more than 10% fall on concerns about shrinking margins on higher costs of memory chips and other costs related to AI spending,” Bank of New Zealand senior markets strategist Jason Wong said in a note. “It hasn’t been all bad news for equities though, as global markets continue to outperform the US.”

The old world

European stock markets were mixed with London’s FTSE 100 down 0.7% after data showed the UK economy grew just 0.1% in the December quarter, missing forecasts and reaffirming expectations the Bank of England will cut the benchmark interest rate next month.

Meanwhile, Germany’s DAX 30 was fractionally weaker with as Mercedes-Benz warned profit could fall further this year after December quarter earnings more than halved, while France’s CAC 40 gained 0.3% with Hermes reporting quarterly sales growth on strong demand for its Birkin bags.

US inflation data on Friday are the next major economic release for the world’s biggest economy, following a strong jobs report earlier this week that caused bond traders to rethink how soon the Federal Reserve’s next rate cut will come. The kiwi dollar fell to 60.34 US cents at 7am in Auckland from 60.56 cents yesterday.

Wall Street’s soft lead is set to continue into the antipodes, with futures pointing to a 0.1% decline for the ASX200 when trading opens across the Tasman.

Westpac Banking Corp is the next of the big four banks to update the market today, following strong showings from ANZ Group Holdings and Commonwealth Bank of Australia.

South Port New Zealand will report its first-half result on the NZX today, with the domestic earnings season gathering pace next week.

Local data today include the BNZ-BusinessNZ performance of manufacturing index and the Reserve Bank’s survey of inflation expectations. Statistics New Zealand’s travel and migration figures for December are also due today.

Reporting by Paul McBeth. Image from Denys Nevozhai on Unsplash.