The S&P 500 and Nasdaq slumped to multi-week lows Wednesday after Tesla and Alphabet disappointed with lackluster earnings, prompting investors to question if the Big Tech- and AI-fueled 2024 equity rally was sustainable in the long run.

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.

The benchmark S&P 500 touched its lowest since July 1, and the tech-heavy Nasdaq Composite fell to a six-week low.

Tesla weighed heavily, slumping 11.2% and set to lose more than $80 billion in market value at current levels from Tuesday's close, if losses hold. The electric-vehicle maker reported its lowest profit margin in more than five years and missed second-quarter earnings estimates.

Google parent Alphabet shed 4.9% 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 more than 3.2% each. Information Technology was the weakest performer of the 11 S&P sectors, tumbling 3.5% to a six-week low.

"There was obviously nothing positive (in the results) and this market requires something to exceed expectations to keep itself going," said Tom Plumb, chief executive and portfolio manager at Plumb Funds.

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.

"I can't help thinking (that) if the tech sector does sneeze, the whole market could catch it," said David Morrison, senior market analyst at Trade Nation.

The other megacaps were also trading lower, with Apple , Microsoft, Amazon.com, Meta Platforms and Nvidia all down between 2.6% and 5.2%.

Meanwhile, the blue-chip Dow hit a nearly two-week low, with Visa dropping 3.7% after its third-quarter revenue growth fell short of expectations.

At 3:06 p.m. ET, the S&P 500 lost 118.71 points, or 2.14%, to 5,437.03 points, while the Nasdaq lost 617.52 points, or 3.43%, to 17,381.27. The Dow Jones Industrial Average fell 413.72 points, or 1.07%, to 39,926.37.

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 was down 0.5%.

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 4.9% after beating forecasts for wireless subscriber additions, while solar inverter maker Enphase Energy jumped 13.2% after reporting a second-quarter operating profit beat.

Meanwhile, Roper Technologies was set for its worst day in four years, dropping 8.6%, after it signaled third-quarter profit would fall below estimates. Boston Scientific traded 0.8% down, despite lifting its 2024 profit target and beating second-quarter earnings estimates.