The Wall Street benchmarks slumped on Thursday as Facebook parent company Meta's stock marked a record one-day plunge following a disappointing earnings forecast that shook the global tech landscape.
Meta's stock plunged 26.4%, erasing more than $230 billion in market value – comparable to the size of New Zealand's economy – the largest drop in history, after its results raised doubts about the troubled social media giant's future.
Because Meta is valued so highly, a big swing in its stock price can also sink or lift broader market indexes. The S&P 500 index fell 1.6% as of 2:04 p.m. EST and the tech-heavy Nasdaq fell 2.6%.
The Dow Jones Industrial Average, which does not include Meta Platforms, fell 278 points, or 0.8%, to 35,351.
Meta sank after forecasting revenue well below analysts’ expectations for the current quarter, a disappointment for a company that investors have become accustomed to delivering spectacular growth.
It also reported a rare decline in profit due to a sharp increase in expenses as it invests in transforming itself into a virtual reality-based company.
Ahead of results, analysts expected 1.95 billion daily active users on Facebook, but Meta reported 1.93 billion – a key indicator for where the platform is headed.
On the financial side, Meta reported a turnover of $33.67 billion, in line with its forecasts, but it made $10.3 billion in net profit in the fourth quarter, 8% less than last year.
Investors also recoiled at Facebook's report of losing roughly 1 million daily users globally between the last two quarters of 2021 – a fraction of the total but a potential signal of stagnation.
"It's the first time the user base is shrinking," said analyst Adam Sarhan from 50 Park Investment. "If the company is not growing, then it's a complete reset for investors," he added.
It is essential to note Meta is still massive and growing on the whole – as 2021 closed, 2.8 billion people used one of its four platforms and messenger services at least once a day, and 3.6 billion at least once a month.
One way out of Meta's troubles would be to acquire the next big thing in social media, as it has done previously.
But the company is under considerable scrutiny from United States regulators after the damning allegations that emerged from its whistleblower crisis last year.
The steep drop weighed on fellow social media company Twitter, which shed 5.6%. Snapchat's parent company Snap sank 21.6% and Pinterest lost 9.3%.
Big tech stocks such as Alphabet Inc. and Microsoft Corp. fell about 1.3% and 2.3%, respectively, while Amazon.com Inc. declined 6.5%.
Big technology and communications companies played a big role in driving gains for the broader market throughout the pandemic and much of the recovery in 2021, but the market seems to have shifted, said Brad McMillan, chief investment officer for Commonwealth Financial Network.
"There’s a general sense that what’s been moving the market higher is not going to take us to the next level," McMillan said. "The question is where is the next growth engine coming from," he noted.
Communications and technology stocks had some of the biggest losses. The sectors have been behind much of the choppiness in markets since the beginning of the year as investors shift money in expectation of rising interest rates. Higher rates make shares in high-flying tech companies and other expensive growth stocks relatively less attractive to investors.
Bond yields rose sharply on Thursday. The yield on the 10-year Treasury note, which is used as a benchmark to set interest rates on mortgages and many other kinds of loans, rose to 1.83% from 1.76% late Wednesday.
Wall Street anticipates the Federal Reserve's (Fed) first interest rate hike to come in March and is cautiously watching for how the central bank paces future increases to help fight rising inflation.
"It's not a perfect path, it'll be bumpy, but the direction is pretty clear," said Guy LeBas, chief fixed-income strategist at Janney Capital Management.
Inflation will likely persist until supply chains loosen and help ease costs for businesses, while lowering prices for consumers. Still, the Fed needs to convince people that it is taking steps to fight rising inflation.
"The idea is that raising short-term rates reduces the perception that inflation will be higher in the future," LeBas said. "If the Fed successfully pulls this off, then expectations won't rise," he reasoned.
Investors also have their eyes on monetary policy updates in Europe. The Bank of England (BoE) raised interest rates for the second time in three months on Thursday, putting the United Kingdom far ahead of the rest of Europe and the U.S. in moving to tame surging inflation that is squeezing consumers and businesses.
In contrast, the European Central Bank (ECB) doesn’t plan to raise rates until 2023 despite record inflation, blaming it on temporary factors. But it has decided the economic recovery is strong enough to start carefully dialing back some of its stimulus efforts over the next year.
Spotify slumped 16.6% after the leading music-streaming service gave investors a weak forecast for a closely watched measure of its earnings.
The company has come under pressure after Neil Young pulled his music from its platform to protest the spreading of COVID-19 misinformation by Spotify's star podcaster, Joe Rogan. Other musicians have followed.
The losses on Wall Street threaten to end a run of solid daily gains for the major indexes this week, though they are still on track for weekly gains. Investors had been encouraged by strong earnings reports from companies such as Apple, Exxon, UPS and Google’s parent Alphabet over the past few days.
Some earnings reports did draw a positive reaction Thursday. Wireless carrier T-Mobile rose 10.6% after reporting strong results. Health insurer Humana rose 6.3% and upscale clothing company Ralph Lauren rose 4.9% after also reporting encouraging financial results.
But outside of those bright spots, the slump for stocks was broad. Retailers, industrial companies and energy companies also fell. Household and personal goods makers eked out gains.
Investors are also preparing for the latest update on the recovering jobs market. The Labor Department will release its monthly report for January on Friday.