US pre-open: Nasdaq under pressure as Microsoft and Alphabet shares drop

Underwhelming results from Microsoft and Alphabet overnight were expected to weigh on US stock markets on Wednesday, with heavy falls on the Nasdaq seen ahead of the opening bell.

Nervousness ahead of some key economic data and a Federal Reserve policy decision was likely prompting investors to take profits, with the Dow and S&P 500 trading at or close to record highs.

As of 0517 in New York, the Dow was holding steady at Tuesday's all-time closing high of 38,467.31 in pre-market trade, but the S&P 500 fell 0.5% and the tech-heavy Nasdaq slumped 1.2% as Microsoft and Alphabet futures fell 1.5% and 5.5% respectively.

"When your shares are up over 8% year to date in anticipation of a bumper set of earnings numbers then a realistic expectation is that you deliver on those expectations, and that is the challenge facing all of big tech this week," said analyst Michael Hewson from CMC Markets. "With the share prices of Microsoft and Alphabet both getting January off to a strong start and Microsoft establishing itself as the biggest company in the world, overtaking Apple in the process as a $3trn company, the expectations management goes into overdrive."

Microsoft delivered a record fiscal second quarter, beating analysts' forecasts with both revenues and profits, driven by a 30% jump in sales for its Azure division. However, the market was firmly focusing on guidance for the third quarter, as the company pointed to revenues of $60-61bn, or $60.5bn at the mid-point, slightly under the current consensus estimate of $60.93bn.

Google owner Alphabet also overshot market estimates with its fiscal fourth quarter but shares dropped sharply with market chatter pointing to disappointing search revenues.

"All in all, these were another set of decent numbers, more than beating expectations on the headline level, however given the gains seen since October the margin for error becomes miniscule in terms of an excuse for some profit taking," Hewson said. "This appears to be where we are with respect to the gains seen so far this year, with the risk that we could see more froth blown off the gains so far year to date even if we beat expectations, with Meta, Apple, and Amazon due tomorrow."

In other news, Paramount Global shares were up 20% ahead of the bell after Bloomberg News reported that Allen Media Group and other partners are launching a bid of $14bn. Allen Media Group is run by media tycoon Byron Allen.

Wednesday will see the release of the ADP Employment Report, due out at 0815 ET, which is tipped to show private-job creation of 145,000 in January, down from 164,000 in December. This comes ahead of the official non-farm payroll data due on Friday.

Investors were also looking ahead to the Federal Reserve's two-day policy meeting which culminates at 1400 ET Wednesday, but is widely expected to see the central bank stand pat on interest rates. The market will be on the lookout for more clarity on the outlook for rates since market expectations of a cut in March have been recently pushed back following resilient economic data.