What caused the recent stock market crash?

US Stocks Plunge After Weak Economic Data Published — The Dow Jones Industrial Index shed more than 1,000 points on Aug. 5. Jaap Arriens/NurPhoto via Getty Images

On Monday (Aug. 5), the S&P 500 experienced its worst day in two years, plummeting 3 percent. The Dow Jones Industrial Index and Nasdaq also fell by 2.6 percent and 3.4 percent, respectively. Meanwhile, the Japanese Nikkei Index suffered a staggering 13.4 percent loss, marking its worst day since 1987. Investors began to sell off shares following last Thursday’s jobs report, which indicated that unemployment had risen to 4.3 percent, the highest level since late 2021, raising concerns about a potential recession in the U.S.

The so-called “Magnificent Seven” companies—Meta (META), Microsoft (MSFT), Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Tesla (TSLA), and Nvidia (NVDA)—which account for roughly a third of the S&P 500’s market value, collectively lost $653 billion in market capitalization in just one day. This reflects investor sentiment that the A.I. promises made by these Big Tech companies may not be sufficient to stabilize the market.

This week’s stock decline followed generally disappointing quarterly earnings from Meta, Microsoft, Amazon, Apple, and Alphabet. Except for Apple, the other four companies reported increased capital spending on A.I. projects in the latest quarter and anticipate further growth in spending for the second half of the year.

Microsoft

Microsoft’s earnings report on July 30 caused Nvidia’s stock to surge by 13 percent, but Microsoft’s own shares fell by 7.8 percent after CEO Satya Nadella and CFO Amy Hood announced an increase in spending on computing infrastructure. Investors were disappointed to see Microsoft’s cloud revenue rise only 29 percent year-over-year, falling short of analysts’ expectations of a 31 percent growth.

For the April-June quarter, Microsoft reported a CapEx of $19 billion, a 78 percent increase from the previous year, primarily directed towards cloud and A.I. projects. However, A.I. services contributed only 8 percentage points to Azure’s revenue growth, which was below investors’ expectations of a significant increase from the 7 percentage points in the previous quarter.

Revenue was $64.73 billion, up 15 percent year-over-year, exceeding expectations of $64.52 billion.
Earnings per share was $2.95, up 11.3 percent year-over-year, surpassing expectations of $2.93.
Net income was $22.04 billion, up 9.7 percent year-over-year.

Amazon

Amazon’s stock dropped 11 percent on Aug. 1 after the company’s quarterly revenue fell short of analyst expectations, despite aggressive cost-cutting measures that nearly doubled its operating income from the previous year to $14.7 billion during the April-June quarter.

Like its Big Tech counterparts, Amazon is heavily investing in A.I. but has yet to demonstrate to investors that this investment is yielding results. Most of Amazon’s A.I. revenue is expected to come from its cloud computing division, Amazon Web Services (AWS). While AWS growth was promising, with revenue rising double-digits from the previous year, Amazon’s leadership did not clarify how much of that growth was attributable to A.I. CFO Brian Olsavsky mentioned that Amazon spent $30 billion in the first half of 2024 to enhance AWS’s A.I. tools and anticipates that spending will increase in the latter half of the year.

Revenue was $147.98 billion, up 10 percent year-over-year but falling short of the $148.56 billion expected. (AWS revenue was $26.3 billion, up 19 percent year-over-year, exceeding the $26 billion expected.)
Earnings per share was $1.26, up 93 percent year-over-year, far surpassing the $1.03 expected.
Operating income was $14.7 billion, up 91 percent year-over-year.

Alphabet

Google (GOOGL)’s parent company struggled to convince investors that its flagship product, Google Search, would withstand competition from OpenAI and other A.I. chatbots, leading to a 5 percent drop in stock price after earnings on July 23, despite a 14 percent increase in search revenue to $49 billion.

Alphabet anticipates its CapEx in 2024 will reach around $50 billion, primarily focused on A.I. capabilities. Ruth Porat, Alphabet’s chief investment officer and CFO, did not specify how much revenue growth could be attributed to A.I. but noted the company has “seen the benefit of our strength in A.I., A.I. infrastructure, as well as generative A.I. solutions for cloud customers.”

In May, Google launched AI Overviews, which provides summarized responses to search queries, allowing users to bypass sifting through multiple sources. The feature received mixed reviews initially, but Alphabet has promised to enhance the functionality to reduce inaccuracies.

Revenue was $84.74 billion, rising 13.6 percent year-over-year, exceeding expectations of $84.19 billion.
Earnings per share was $1.89, rising 13.6 percent year-over-year, surpassing expectations of $1.84.
Profit was $23.6 billion, rising 29 percent year-over-year, beating expectations of $22.7 billion.

Apple

Apple has been somewhat insulated from the A.I. hype compared to its Big Tech peers, largely due to its focus on hardware products and wearables. The iPhone maker’s shares remained stable after reporting earnings on Aug. 1, despite exceeding analyst expectations for both revenue and profit. The subdued market reaction was partly due to a 1 percent decline in iPhone sales during the April-June quarter.

In June, Apple launched its suite of A.I. offerings, called Apple Intelligence. CEO Tim Cook stated that these features “will transform how users interact with technology,” encompassing writing, image creation, and notification summarization and prioritization.

Revenue was $85.78 billion, up 5 percent year-over-year, exceeding expectations of $84.53 billion.
Earnings per share was $1.40, up 11 percent year-over-year, surpassing expectations of $1.35.
Net income was $21.45 billion, up 8 percent year-over-year.

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