US close: S&P 500, Nasdaq at five-month low as Alphabet shares tank

US equity markets dropped on Wednesday, though the Nasdaq bore the brunt of the selling pressure after the tech-heavy index was hammered by disappointing results from Google parent Alphabet.

The Nasdaq was down 2.4% by the close, while the S&P 500 fell 1.4% – with both indices dropping to levels not seen since late-May.

However, the Dow Jones Industrial Average held up well, slipping just 0.3%. The DJIA is relatively immune to the tech sector due to its heavy exposure to the consumer, retail and finance sectors.

With economic data on the quiet side on Wednesday – ahead of key GDP and inflation figures later in the week – investors were firmly focusing on earnings.

Shares in Alphabet dropped over 9% after the company underwhelmed the market with its cloud-computing sales. Third-quarter revenues were up 11% at $77bn, but top-line growth in cloud slowed to a worse-than-expected 22%.

"Investors are worried that Alphabet is losing out to Microsoft and Amazon in a sector deemed to have enormous growth potential due to the future uptake of generative AI," said David Morrison, senior market analyst at Trade Nation.

In contrast, Microsoft rose 3% after the company reported a 13% jump in revenues for its fiscal first quarter to $56.5bn, helped by strong demand for cloud computing services. The company also guided to $60.4-61.4bn in revenues for the second quarter, well ahead of the $58.7bn consensus estimate.

After spending most of the morning in the red, shares of the big three automakers raced ahead on afternoon reports that they were nearing a potential deal with the United Auto Workers union to end factory strikes. Ford, General Motors and Chrysler owner Stellantis all finished over 1% higher.

The only major economic data release of the day were US new home sales, which unexpectedly surged 12.3% to 759,000, well ahead of the 680,000 consensus forecast.

Commenting on the data, analysts at Oxford Economics said: "New home sales have been resilient despite a rise in mortgage rates to a 23-year high of 7.6%. With the supply of existing homes for sale extremely tight, homebuilders continue to see an opportunity to generate sales by providing incentives such as price cuts or mortgage rate buydowns."

However, they said that home sales are expected to weaken in the fourth quarter and fall below the 600,000 level by early next year. "Homebuilders are seeing prospective buyers retreat to the sidelines. We also expect a weaker economy and softer labor market conditions to weigh on housing demand."