US stock markets ended Thursday's session significantly lower as Alphabet's disappointing earnings results reignited concerns about soaring AI costs, while investors assessed fresh inflation data following the Federal Reserve's decision to keep interest rates unchanged. The Nasdaq Composite fell 1.36% to 26,188.08, leading the decline, while the S&P 500 declined 0.31% to 7,721.02 and the Dow Jones Industrial Average slipped 0.25% to 52,345.80. According to Reuters, all three major US stock indexes were in negative territory, with the Nasdaq dragged sharply lower by tech and tech-related megacaps in the wake of Alphabet's disappointing quarterly results. The smallcap Russell 2000 advanced, suggesting investors were finding opportunities beyond the crowded AI trade. Among the 11 major sectors in the S&P 500, communication services and tech were down the most, while healthcare led the gainers. As per The Economic Times, investor focus shifted to inflation numbers and corporate profitability, which displayed resilience despite the market decline.
The decline in Nasdaq 100 futures comes as investors assessed Alphabet's third quarter results, which missed expectations on adjusted earnings per share and revenue. As reported by CNBC TV18, the Google parent's shares tumbled around 11% in premarket trading following the disappointing earnings announcement. Alphabet shares dropped 13.2% following the quarterly report released late Wednesday, with the revenue miss compounded by accelerated AI-related cash burn. The company reported negative free cash flow of $9.07 billion, drawing attention to the costs of its AI investments. While Alphabet's cloud business recorded growth of 103%, concerns over cash flow and returns on AI investments weighed heavily on the stock. The company maintained its full-year capital expenditure guidance at $195 billion to $205 billion, more than double what it spent last year, raising questions about whether heavy AI investments are translating into sufficient financial returns.
Semiconductor stocks were poised to snap their four-day winning streak, dropping 2.0% as investors sought to distinguish between companies that can fund their lofty AI ambitions from those that burn through cash and borrow funds to realize their ambitions. AI-related stocks were severely affected with the iShares Semiconductor Exchange Traded Fund (ETF) falling 2.19% to $510.31 and the Roundhill Memory ETF declining 3.92% to $52. Double-digit losses were recorded for Fortinet (FTNT) and ServiceNow (NOW) following their earnings reports, with Fortinet and ServiceNow dropping more than 20% each after their quarterly results. Marvell Technology slumped 12.8% after media reports said the company was in advanced talks to buy data-center optics maker Lumentum Holdings. The broader AI sector weakness reflects investor concerns about the financial returns on artificial intelligence investments across the technology industry, with the sell off reflecting growing scrutiny of companies pursuing expensive AI ambitions, particularly those relying on borrowing and heavy cash outflows to fund their expansion.
Investors are closely monitoring the US Federal Reserve's decision to hold US rates steady, with policymakers choosing to hold rates steady on Wednesday, acknowledging that while price pressures remain "elevated," the central bank will decide on its next move as it "accumulates more information." According to Reuters, a raft of economic data released on Thursday answered that call, with a first take on third-quarter GDP that showed the US economy grew at a faster-than-expected pace in the third quarter, while price growth continued to gain heat with a war-related oil supply crunch feeding into broader, systemic inflation. Third-quarter earnings season has crossed the halfway point, with 253 of the companies in the S&P 500 having reported, of those 81% have beaten analyst expectations, according to the most recent LSEG data. Analysts now expect aggregate third-quarter S&P 500 earnings growth of 31.0%, year-on-year, per LSEG.
Caterpillar topped quarterly profit estimates but left its growth targets unchanged, with shares tumbling 9.5%. Eli Lilly jumped 6.3% after the drugmaker lifted its revenue outlook on the strength of weight-loss drug sales. Ford gained 2.9% following the automaker's third-quarter revenue beat. Merck beat earnings expectations on the strength of its cancer drug Keytruda and its HPV vaccine Gardasil, with shares advancing 4.4%. Amazon's shares were off 3.9% ahead of its earnings report, expected after the closing bell. Advancing issues outnumbered decliners by a 1.59-to-1 ratio on the NYSE, with 113 new highs and 155 new lows on the NYSE, and 2,416 stocks rose and 2,221 fell on the Nasdaq. The S&P 500 posted 19 new 52-week highs and six new lows while the Nasdaq Composite recorded 81 new highs and 131 new lows.
