The Stock Market Drops as Snap Guidance Rekindles Recession Fears

The Dow outperformed the Nasdaq by 2.5 percentage points. Before Tuesday, there were only 25 trading days when the Dow outperformed the Nasdaq by at least 2 percentage points since September 2008, according to Dow Jones market data. 

“Global equities sold off with lower revenue and profit guidance from Snap Inc. serving as the catalyst,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. 

Late on Monday, Snap (ticker: SNAP) lowered its sales and profit forecast for the current quarter, citing a deteriorating economy. The parent company of the popular app Snapchat said in a filing with the Securities and Exchange Commission that it will likely see sales and earnings before interest, tax, depreciation, and amortization come in at the lower end of the range it had told investors to expect for the quarter. That is because “the macroeconomic environment has deteriorated further and faster than anticipated,” the company said in the filing. 

The company had said Ebitda would be between breakeven and $50 million, with sales of just over $1.1 billion. With the higher end of that range now unlikely, RBC analysts lowered their 2022 Ebitda estimate to $310 million from $692 million and cut their 2023 estimates by a similar percentage as well. The stock closed down 43% at $12.79.

For the rest of the digital advertising and e-commerce area, “the [Snap] read for the space is broadly negative,” wrote RBC analyst Brad Erickson. 

Indeed,

Meta Platforms

(FB) stock dropped 7.6%.

Alphabet

(GOOGL) stock fell 5%, while

Pinterest

(PINS),

Etsy

(ETSY), and

eBay

(EBAY) fell 23%, 7.7%, and 2.2%, respectively.

Amazon.com

(AMZN) stock dropped 3.2%. 

For the rest of the market, the fear is that consumers are spending less. That is consistent with what

Target

(TGT) showed on its earnings report, which revealed that consumers were spending more on essential items and less on discretionary products like clothing and electronics.  

Overall, “the market has been fearing downward earnings forecasts by Street analysts,” wrote Louis Navellier, founder of Navellier & Associates. 

Two main culprits are to blame for consumers’ current challenge: inflation and interest rates. Inflation remains stubbornly high as Russia’s attack on Ukraine causes commodity prices to soar and as companies continue to struggle to produce enough goods to meet a still-high level of economic demand. Central banks around the globe are trying to combat that inflation by lifting short-term interest rates to slow down the economy and cut into demand.

Tuesday’s loss put the brakes on a big rally in the past few days. The S&P 500 had gained 4.3% from a Friday afternoon bottom, when the index hit bear market territory, to Monday’s close. The tech-heavy Nasdaq gained 4.5% in the same span.

Money has been flowing into technology stocks. Retail investors, such as those on popular trading apps like Robinhood or TD Ameritrade, have purchased a net $979 million a week in S&P 500 technology stocks and exchange-traded funds in the past month, according to Bank of America. That is more than 20 times the average net weekly inflow seen in the past three months, a major improvement from the net outflow seen in the average week in the past year. 

“This latest warning from companies comes just as risk sentiment was trying to find a firmer footing,” wrote Fiona Cincotta, senior financial markets analyst City Index. “But actually, what it tells us is there is still more bad news to come out in the wash, which inevitably means more downside to come.”

Usually, tech stocks can perform well during tough times because the innovations they offer allow them to grow rapidly. But the latest economic headwinds come as that growth has been slowing, making the companies more sensitive to macro changes. 

One positive factor is that non-tech stocks slipped, rather than selling off. The Invesco S&P 500 Equal Weight Exchange-Traded Fund (RSP), which weights each stock in the index equally and therefore shows the movement of the average stock, fell just 0.6%.

Still, investors moved money into safer assets. The 10-year Treasury note’s price rose, with the yield falling to 2.75%. That is down from just over 3% in early May, a level it hasn’t been able to rise much far above in the post-financial crisis era. 

“Treasury yields plunge as risk aversion returns following a gloomy outlook from Snap,” wrote Edward Moya, senior market analyst at Oanda. 

Here are some other stocks on the move Tuesday: 

Zoom Video

(ZM) was up 5.6% in late trading after the videoconferencing company posted better-than-expected profit in its fiscal first quarter ended April 30.

Best Buy

(BBY) rose 1.2% after its sales topped estimates.

Abercrombie & Fitch

(ANF) stock tumbled 29% after reporting a surprise loss.

Insulet

(PODD) gained 7.4% on reports it is in talks to be acquired by

DexCom

(DXCM). DexCom stock was down 8.9%.

Roblox

(RBLX) stock dropped 10% after getting downgraded to Neutral from Overweight at Atlantic Equities. 

AutoZone

(AZO) stock rose 5.8% after the company reported a profit of 29 cents a share, beating estimates of 26 cents a share, on sales of $3.9 billion, above expectations for $3.7 billion. 

Write to Joe Woelfel at [email protected] and Jacob Sonenshine at [email protected]