Alphabet and Meta earnings cause two-day selloff in tech stocks as investors discover 'wrinkles'.

• Both Alphabet and Meta reported better-than-expected results, but investors discovered troubling information about each.
• The Nasdaq has lost close to 3.5% over the past two days.
• Guggenheim analysts reported on Wednesday that at Meta, "management's conservative tone dampened excitement for a robust outcome and directed guidance."

After Wall Street estimates were surpassed on Tuesday, earnings continued to perform well on Wednesday, exceeding expectations.

It didn’t matter.

Over two days, the Nasdaq dropped roughly 3% following better-than-expected results on the top and bottom lines from two of the most valuable tech companies in the world.

As the tech industry prepares to release its third-quarter report after Thursday's close and announce its next steps, investors are shifting their focus from past performance to future prospects, with the year-end quickly approaching.

Wall Street expressed concern about Alphabet's earnings report, specifically regarding the performance of its Google Cloud division, which is heavily investing to compete with Amazon in managing large artificial intelligence workloads. Despite reporting $8.41 billion in quarterly revenue, the cloud group fell short of analysts' expectations of $8.64 billion, according to LSEG, formerly known as Refinitiv.

Alphabet's finance chief, Ruth Porat, informed analysts that the figures indicate "the effect of customer cost-cutting measures," which typically entails clients reducing their expenditure.

Li, Meta's CFO, expressed concerns on the earnings call about the advertising market in the fourth quarter due to the escalating conflict in the Middle East and uncertainty about its impact on ad spending. As a result, Meta provided a wider revenue guidance range than usual.

Li stated on the call that we noticed softer ads at the start of the fourth quarter, which coincided with the beginning of the conflict, as reflected in our Q4 revenue outlook. However, it is challenging for us to directly attribute the demand softness to any particular geopolitical event.

Over the past two days, Alphabet shares have fallen by approximately 12%, Meta has dropped roughly 7%, and Amazon's stock has declined more than 6%.

In 2023, the tech industry has experienced a rebound, with mega-cap stocks performing better after a difficult 2022. Meta, an AI chipmaker, has been the second-best performing stock in the S&P 500, with a 140% increase in value, surpassing the Nasdaq's 21% gain. Alphabet and Amazon have also experienced significant growth, with Alphabet increasing by 39% and Amazon gaining 42%.

The three internet companies implemented substantial cost-cutting measures, including job cuts and project cancellations, starting late last year or early in 2023. Meta CEO Mark Zuckerberg declared 2023 as the "year of efficiency," while Alphabet CEO Sundar Pichai acknowledged in January that Google had hired for a different economic reality than the one they currently face.

Despite investors' initial enthusiasm over the company's new emphasis on cost control, growing economic uncertainty and the difficulties posed by rising interest rates are causing increasing concern.

Despite the challenges, the US economy has shown strength. The Commerce Department announced on Thursday that GDP increased at a seasonally adjusted 4.9% annualized rate in the third quarter, up from an unrevised 2.1% pace in the second quarter.

With the ongoing conflict in Ukraine and Biden's pledge to aid Israel in its fight against Hamas, the global economy remains uncertain.

Meta expressed its concerns about the potential business impact of war in the Middle East on its operations to its shareholders.

Analysts from Guggenheim, in a report late Wednesday, wrote that although management's conservative tone dampened their enthusiasm for a strong result, they still recommend buying the stock.

On Thursday, Mark Avallone, president of Potomac Wealth Advisors, stated on CNBC’s “The Exchange” that the latest earnings reports reveal the level of investor uncertainty. According to Avallone, Alphabet's earnings were strong in terms of advertising and YouTube, its core businesses. However, the selloff linked to the cloud numbers suggests that "people are looking for problems where they may or may not exist."

Avallone stated that the earnings reports were not as bad as they were perceived, and that there were only minor issues that were being overblown. He then criticized the negative portrayal of America's top companies, arguing that there was an excessive reaction to the reports.

Amazon's earnings may be met with an overreaction if any doubt is cast.