The US stock markets experienced their worst day in over 18 months on Wednesday, after disappointing results from heavyweights Tesla and Alphabet further exacerbated the sell-off in the technology sector.

The blue-chip index S&P 500 fell by 2.3 percent, the biggest drop since December 2022. The tech-heavy Nasdaq Composite declined by 3.6 percent, marking its largest loss since October 2022. The losses were primarily driven by major technology stocks such as Nvidia, Microsoft, Apple, and Tesla. These tech and AI stocks have fueled a large portion of the market gains this year.

Tesla dropped 12.3 percent, recording its worst daily loss since 2020 after the electric vehicle manufacturer reported earnings on Tuesday that were far below expectations. Alphabet stock, Google's parent company, fell 5 percent despite slightly exceeding revenue forecasts, marking its worst day since January. Particularly disappointing was YouTube's advertising revenue, which missed consensus estimates.

This sell-off deepens the recent slump in the high-flying technology sector as investors turn away from stocks boosted by AI optimism and instead shift their focus to less noticed market segments like smaller companies.

The chip manufacturer Nvidia was the biggest drag on the S&P 500 and fell by 6.8 percent on Wednesday. Super Micro Computer and ASML Holdings, both semiconductor stocks, were among the biggest losers in the Nasdaq.

The Nasdaq is now more than 7 percent away from its closing record on July 10, after US inflation falling below expectations triggered the dramatic market turnaround for the first time.

The results of Alphabet and Tesla could 'fuel concerns' that the broader market is too heavily reliant on the so-called 'Magnificent Seven' of major tech stocks, said Charlie McElligott, an analyst at Nomura. 'The risk sentiment remains fragile,' he added.

UBS confirmed its "Sell" rating for Tesla stock on Wednesday, warning that the "timeline and success prospects" for the introduction of self-driving "robotaxis" remained unclear.

On Tuesday, Tesla's billionaire CEO Elon Musk officially postponed the launch of these vehicles from August to October. Nevertheless, he claimed that the project could boost the company's value to up to 5 trillion dollars – about six times the current market value.

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All of the so-called "Magnificent Seven" recorded losses on Wednesday. Besides Nvidia, Meta, the parent company of Facebook, dropped by 5.6 percent, Microsoft fell by 3.6 percent, and Apple by 2.9 percent.

We see that some of the Magnificent Seven are digging their heels in when it comes to AI spending," said Kevin Gordon, Senior Investment Strategist at Charles Schwab, "and if they don't significantly exceed [profit] expectations, there will be profit-taking.

The Russell 2000 Index for smaller companies, which had recently risen sharply due to hopes of interest rate cuts as early as September, fell by only 2.1 percent.

The sell-off on Wednesday comes as "the macroeconomic picture seems to be crumbling," JPMorgan analysts said in a note to clients. They pointed to weaker regional activity data and a still "crumbling" real estate market.

U.S. Treasury bonds recovered as investors sought safe assets and bet on Federal Reserve interest rate cuts. The two-year yields, which are particularly sensitive to interest rate expectations, fell by 0.03 percentage points to 4.42 percent after having previously reached their lowest level since February earlier in the day.

Next week, major tech companies like Meta, Amazon, and Apple will announce their quarterly results.