US stocks suffered a sharp selloff on Friday as the Nasdaq 100 crashed 2.8%, recording its largest single-day percentage decline since June 5 and ending October with monthly losses. The S&P 500 fell 1.4% as of 11:17 a.m. New York time, while the Dow Jones Industrial Average dropped 0.6%. According to Bloomberg, the decline was triggered by disappointing results from tech companies and raised concerns that the artificial intelligence hype, which has driven the equity bull market, may be exaggerated. The latest selloff followed quarterly results from Intel and Amazon, released late Thursday, which failed to meet investor expectations. In market capitalization terms, the Nasdaq 100 has already wiped out more than $1.2 trillion in market capitalization in October. As reported by Bloomberg, the U.S. stock market remains only 3.1% below its all-time high, but it's become increasingly shaky as Tuesday's midterm elections approach, with worries about AI becoming a concern for voters across political parties.
The Nasdaq 100's 2.8% plunge was led by severe declines in major technology stocks, with Intel experiencing its largest decline in over forty years after the chipmaker gave a forecast for profit in the final three months of this year that fell short of analysts' expectations. Intel led the decline with a 28% plunge for its worst drop since 1974 after the company issued a weaker-than-expected outlook and warned that the slowdown in the personal computer market could continue into next year. Nvidia declined 4.2%, while Advanced Micro Devices fell 9% and the broader chips index shed 7%. Server makers Dell and HP lost 10.4% and 8.7% respectively. According to Bloomberg, the semiconductor sector told the story better than anything else, with the Philadelphia Semiconductor Index down around 9% at one stage, and the selling rolled straight across the Pacific into names that had looked like toll collectors on the AI superhighway only days earlier.
Amazon shares fell 1.4% after the e-commerce giant reported a weaker profit for the summer than analysts expected. Potentially more concerning for investors was Amazon's reporting that it burned through $42.4 billion of cash over the prior 12 months, according to a measure called free cash flow, with the company spending $94.8 billion on property and equipment, primarily through investments in artificial-intelligence technology. The company reported earnings of $1.89 per share, below analysts' estimates of $1.96, with revenue at $201.94 billion, marginally short of the Street's estimate of $202.31 billion. The outlook added to investor concerns about the scale of investments required to expand AI infrastructure and the time needed to generate meaningful returns. The technology industry's largest cloud and internet companies have been accelerating investments to keep pace with growing demand for AI infrastructure, with CEO Andy Jassy telling investors that the company expects to "spend meaningfully more in 2027." However, the aggressive investment cycle has taken a toll on cash flow, with Amazon reporting negative free cash flow for the second consecutive quarter, with the trailing 12-month outflow reaching $42.4 billion, a 386% swing year-on-year. As reported by Bloomberg, the issue was not some collapse in cloud demand but the increasingly enormous plumbing required to support it, with capital spending keeps climbing and the financing architecture getting more elaborate.
The latest selloff has brought renewed attention to the rising cost of building AI infrastructure and questions over whether companies will be able to generate adequate returns from their investments. According to Bloomberg, the core businesses of America's technology giants — the advertising, consumer and retail machines propping up a collective $750 billion in AI spending this year — are starting to show signs of slowing. In some cases, they're being cannibalized by the very technology the firms are betting the house on. That has sharpened scrutiny of both the durability of AI demand and whether the huge sums being poured into the technology will generate sufficient returns. "It's fair to say that this week, not just today, has been very much about the future of AI and what that's going to look like, whether there will be a positive return on investment and if so, how quickly," said Oliver Pursche, senior vice president at Wealthspire Advisors in New York. He added that companies meeting high investor expectations were performing well, while those falling short were being punished. The prospect of continuously rising AI investments has unsettled investors, particularly as higher borrowing costs threaten to make debt-funded projects more expensive and difficult to justify. Microsoft is reportedly preparing to raise approximately $25 billion through its first US investment-grade bond offering in more than nine years, while other major technology companies have collectively issued hundreds of billions of dollars in bonds over the past four years. Morgan Stanley estimates that total capital expenditure on AI infrastructure will exceed $1 trillion next year, with J.P. Morgan estimating that global AI infrastructure spending could reach $5.5 trillion by 2030, with approximately $900 billion expected to be invested in 2026 alone.
The spreading weakness in technology stocks has triggered a broader risk-off sentiment across markets, with defensive sectors like staples and utilities rising as investors seek safer havens. According to Bloomberg, the Stoxx Europe 600 fell 0.3% and the MSCI World Index dropped 1.2%, while the S&P 500 hovered near its 100-day moving average, a key technical level. Matt Maley at Miller Tabak noted that the biggest problem investors will face in the coming weeks is that the "rotation" that has held up the US stock market could easily disappear. "If the major averages begin to drop in a more compelling manner, it is very likely that investors will stop rotating into other sectors and start rotating into cash," he said. "This is especially true since they have been hearing about a bubble for over a year now." While AI demand remains robust, there's a rising risk of mid-cycle capital expenditures indigestion, according to Ulrike Hoffmann-Burchardi at UBS Chief Investment Office. She recommended that investors should focus on building a resilient portfolio that includes exposure beyond tech, noting that "We continue to see scope for equity gains overall and believe investors should focus on building a resilient portfolio that includes exposure beyond tech."
