The S&P 500 and Nasdaq closed at multi-week lows Wednesday, as lackluster earnings from Tesla and Alphabet undermined investor confidence in megacap tech names that had previously driven 2024's equity rally.

As the first of the Magnificent Seven stocks reported quarterly numbers, investors had been awaiting new data to see if lofty valuations were justified. With these seven companies having such sway over markets, their performance was bound to have wider repercussions.

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Investor reactions pushed both the benchmark S&P 500 and the Nasdaq Composite to their lowest finishes since June. Meanwhile, the Dow Jones Industrial Average closed below 40,000 points for the first time in two weeks.

Dave Grecsek, managing director in investment strategy and research at Aspiriant, noted that the upward momentum of the first two weeks of July in equity markets had now disappeared over the last week.

"There's a little bit of profit-taking, and then people are a little apprehensive about earnings announcements upcoming," he said.

Tesla weighed heavily on Wednesday, slumping after the electric-vehicle maker reported its lowest profit margin in more than five years and missed second-quarter earnings estimates.

Google parent Alphabet dropped despite a second-quarter earnings beat, as investors focused on an advertising-growth slowdown and the company flagged high capital expenses for the year.

Tesla and Alphabet dragged the S&P 500 Communication Services and Consumer Discretionary sector indexes down, with Information Technology also among the weakest performers of the 11 S&P sectors.

Alphabet's losses underscored the high earnings bar for the so-called Magnificent Seven, a set of megacap tech stocks that have notched double- and triple-digit percentage gains in 2024, riding on optimism around AI adoption and expectations of an early start to the Federal Reserve's interest-rate cuts.

"When you put everything in an earnings context, you can really understand why those Mag 7 stocks have been performing so great because the earnings have been there," said Grecsek.

Any doubts, however, about the stocks meeting expectations will induce selling pressure. The other megacaps, Apple, Microsoft, Amazon.com, Meta Platforms and Nvidia, all closed down.

Meanwhile, the blue-chip Dow did not escape the negativity. Visa was among the stocks that weighed on it, dropping after its third-quarter revenue growth fell short of expectations.

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According to preliminary data, the S&P 500 lost 128.10 points, or 2.31%, to end at 5,427.64 points, while the Nasdaq Composite lost 654.94 points, or 3.64%, to 17,342.41. The Dow Jones Industrial Average fell 499.21 points, or 1.24%, to 39,858.88.

Chary of the high valuation of these companies, market participants started shifting to underperforming sectors in mid-July.

S&P 500 stocks, on average, are trading at a 21.4 price-to-earnings ratio, compared with the historical average of 15.9, LSEG data showed. Of the index companies that have reported second-quarter earnings to date, 78.9% have beaten results estimates.

A rotation into smaller-cap stocks has also been eyed, although they did not escape the ripples the megacaps caused: the Russell 2000 finished down.

In economic data, S&P Global's flash U.S. Composite PMI Output Index showed business activity climbed to a 27-month high in July.

Among others, AT&T gained after beating forecasts for wireless subscriber additions, while solar inverter maker Enphase Energy jumped after reporting a second-quarter operating profit beat.

Meanwhile, Roper Technologies dropped after it signaled third-quarter profit would fall below estimates. Boston Scientific traded down, despite lifting its 2024 profit target and beating second-quarter earnings estimates.