Leading US technology stocks suffered a sell-off on Wednesday as the market’s reaction to earnings from Intel and Yahoo demonstrated how much optimism is embedded in current share prices.
Yahoo, the internet portal, and Intel, the largest chip manufacturer, ended down 12.3 per cent and 11.4 per cent respectively, while negative sentiment surrounding these two dragged down other current stars of the sector, such as Google (down 4.8 per cent) and Apple Computer (off 2.6 per cent).
Further unwelcome news came after the market closed as news of strong earnings from Apple was balanced by an outlook that the market found disappointing. Apple shares fell almost 7 per cent in after-hours trading.
EBay’s outlook was similarly greeted, triggering a 6 per cent fall in shares in the internet auction site in the after-market.
The dramatic reaction appeared to confirm warnings from several equity strategists that optimism about earnings was already embedded in share prices, and that the market was exposed to surprises on the down-side.
Intel’s failure to meet analysts’ expectations, and its warning that the outlook for revenue in the current quarter was worse than it had previously predicted, prompted a number of banks to cut their recommendations, including Citigroup and UBS.
But this had more to do with its competitive position than with worries about the sector as a whole. UBS highlighted the threat to Intel from rival Advanced Micro Devices. “AMD is likely to remain a serious competitor to Intel and Intel’s longer-term risk profile is now higher than we previously believed,” analyst Thomas Thornhill said, lowering his rating on Intel to “neutral”.
In the case of Yahoo!, the reaction occurred despite the company meeting its own guidance figures. At 16 cents per share, its earnings fell only marginally short of Wall Street’s official consensus of 17 cents, as compiled by First Call. Both Citigroup and Morgan Stanley described its revenue as “in line”.
Justin Post, tech sector analyst at Merrill Lynch, suggested that valuations had grown so high that companies needed to deliver a positive surprise in order to avoid damage to their share prices. He said: “Beat and raise quarters are probably necessary to support near-term valuations.” He added: “While we expect strong results from eBay, given lofty expectations exiting the fourth quarter, we continue to prefer more conservatively valued InterActive in e-commerce and Expedia in online travel.”
Mark Mahaney of Citigroup described the sell-off as an “over-reaction”. He said: “We attribute this to a ‘miss and lower’ quarter, and the 12 per cent intra-quarter rally in the shares. But we believe that the market over-reacted.”
Mary Meeker, technology analyst at Morgan Stanley, said that she continued to rate Yahoo! an “overweight,” but said that “it may be up to (an) especially strong financial performance - that exceeds the Street’s expectations - to drive the shares higher”. She said this was more likely in the second quarter than the first.
Sharp declines in technology bellwethers Intel and Yahoo dragged down the tech laden Nasdaq Composite Index Wednesday. The index finished at 2279.64, a drop of 23.05 points or 1 percent. The Dow Jones Industrial Average and S&P 500 Index ended the day with losses of 0.38 percent and 0.39 percent to end at 10,854.86 and 1277.93 respectively.

The world's largest chipmaker fell nearly $3 or 11 percent to $22.60. Internet software giant Yahoo was down nearly $5 to close at $35.18 a loss of nearly 12 percent. Analysts blamed disappointing sales forecasts for the first quarter for today's selloff. 

A number of research firms including Citigroup and UBS handed downgrades to Intel stock today. This followed the company's failure to meet analysts’ and its own expectations for revenue and earnings during its fourth quarter earnings release yesterday.  

Thomas Thornhill lowered his stock rating to "neutral" and commented on Intel's competitive situation with arch-rival Advanced Micro Devices. “AMD is likely to remain a serious competitor to Intel and Intel’s longer-term risk profile is now higher than we previously believed”