Nasdaq Slides 2.6% as Meta’s AI Spending Raises Fresh Doubts Over Tech Rally

Wall Street's technology shares suffered their steepest sell-off in months on Thursday as disappointing investor reactions to high-profile earnings reports revived concerns about the cost of the artificial intelligence boom and its potential to reward investors.

The Nasdaq Composite fell 2.60%, losing 694 points to close at 26,008.86, its largest daily percentage decline since early June. The S&P 500 dropped 1.21%, or 93.74 points, to 7,663.43, while the Dow Jones Industrial Average edged up 11.89 points, or 0.02%, to 52,867.98.

The divergence between the indexes underscored the pressure on technology companies, which have accounted for a substantial share of the market's gains this year. Investors reacted sharply to earnings and spending disclosures from Meta Platforms and Tesla, while a broad retreat in semiconductor stocks amplified losses across the technology-heavy Nasdaq.

The Philadelphia Semiconductor Index plunged 6.7%, its largest daily percentage decline since June 23. The index, which has been a major driver of the broader bull market, has now fallen more than 26% from its record closing high on June 22. Despite the correction, it remains up 51.5% for the year, compared with an 11.9% gain for the S&P 500.

The sell-off is seen as an indication that investors are becoming more selective about the AI trade, distinguishing between companies demonstrating clear financial returns and those committing substantial capital to infrastructure and technology whose ultimate profitability remains uncertain.

"It's a wonderful day on Wall Street," said Paul Nolte, senior wealth adviser and market strategist at Murphy & Sylvest in Elmhurst, Illinois. "The only part of the market that is really suffering here is technology, which has been the golden child of the markets up until about June."

"Investors are starting to realize that there are some holes in the AI story," Nolte added. "And that's having an impact on the indices because they're so heavily weighted toward technology."

Meta shares fell 7% despite the Facebook parent reporting results that exceeded analyst expectations. The company recorded its first cash outflow in more than a decade as AI-related expenditure increased, while announcing plans to issue non-voting shares through a two-for-one split to raise capital for the emerging technology.

The market reaction exposes the growing tension between strong reported earnings and the cash required to sustain AI development. Investors are no longer evaluating technology companies solely on revenue growth or earnings beats; capital expenditure, cash generation and the expected returns on infrastructure investment are being increasingly put into consideration.

Meta's results illustrate that shift. Even when a company delivers better-than-expected financial performance, investors may question the implications of rising spending if it puts pressure on cash flow or requires additional financing.

The planned issuance of non-voting shares adds another dimension to that concern. Raising capital can help fund expansion, but it also signals the scale of the resources required to compete in AI. Investors must now assess whether future revenue and productivity gains will justify the additional investment.

Tesla also declined, losing 3.1%, despite unexpectedly generating positive free cash flow during the quarter and cutting its capital expenditure plans for 2026. The reaction suggests that the market's concerns extended beyond individual earnings surprises to the wider technology investment cycle.

Semiconductor stocks bore the brunt of the downturn. Intel, AMD, SanDisk and Marvell each fell more than 8%, reflecting the breadth of selling across companies exposed to the chip industry.

The semiconductor sector has benefited from expectations that AI development will drive sustained demand for processors, memory and other computing components. However, its sharp retreat shows how quickly sentiment can change when investors question the durability of that demand, the pace of infrastructure spending or the valuations attached to future growth.

The correction does not establish that AI demand is collapsing. Rather, it raises questions about how much future growth is already reflected in share prices and whether the expected returns will match the capital being deployed. With the semiconductor index still up more than 50% this year, Thursday's losses also came after a substantial rally that left the sector vulnerable to a reassessment of expectations.

Inflation Risks Add Pressure as Earnings Season Continues

Technology stocks also faced a less supportive macroeconomic environment as renewed tensions in the Middle East pushed crude oil prices to a five-month high.

Iran-backed Houthi forces launched fresh strikes against Saudi targets, raising concerns that an escalation in the region could threaten energy supplies and keep oil prices elevated. Higher energy costs could complicate the Federal Reserve's efforts to bring inflation under control, potentially forcing policymakers to maintain restrictive monetary conditions for longer.

Labor Department data showed initial claims for unemployment benefits remained near multi-decade lows, indicating continued stability in the labor market. While employment resilience can support consumer spending, it may also give the Federal Reserve less reason to ease policy if inflation remains persistent.

Financial markets were pricing in the possibility of another 25-basis-point interest-rate increase before the end of the year. Higher interest rates could weigh heavily on technology stocks because a significant portion of their valuations depends on expected earnings growth in the future. When the cost of capital rises, investors may become less willing to pay elevated multiples for profits that have yet to materialize.

The combination of AI spending uncertainty and renewed inflation concerns therefore created pressure on both corporate earnings expectations and equity valuations. Investors were left weighing the potential of a transformative technology against the financial and macroeconomic risks associated with financing its expansion.

Nevertheless, Thursday's market performance was not uniformly negative. Procter & Gamble rose 5.6% after beating analyst estimates, even as it warned that rising costs would increasingly weigh on profits. The gain supported the consumer staples sector, suggesting that investors were finding opportunities outside technology.

Blackstone advanced 8.4% after saying widening credit spreads on AI-related debt could create opportunities to secure higher returns. Its performance offered a reminder that rising financing costs can hurt borrowers while creating potential opportunities for investors prepared to provide capital at more attractive rates.

Lockheed Martin climbed 7% after raising its annual sales and profit forecasts. Spotify gained 11.1% after projecting fourth-quarter profit above Wall Street estimates, supported by expectations that its AI-powered features would drive user growth. Union Pacific rose 3.6% after beating quarterly earnings expectations on core pricing gains, although it warned that higher fuel prices would weigh on its business.

These gains indicate that investors continued to reward companies with improving earnings prospects or specific opportunities, even as the broader technology trade weakened.

Market Breadth Points to Growing Caution

The broader trading figures showed a market under pressure, particularly on the Nasdaq. On the New York Stock Exchange, advancing stocks narrowly outnumbered decliners by a ratio of 1.01 to one, while 173 stocks reached new 52-week highs and 366 hit new lows.

On the Nasdaq, decliners outnumbered advancers by 1.37 to one, with 2,766 stocks falling against 2,022 rising. The index recorded 342 new 52-week lows compared with 82 new highs. The S&P 500, by contrast, registered 40 new highs and four new lows.

Trading volume across US exchanges reached 18.79 billion shares, above the 20-session average of 17.19 billion, indicating elevated activity during the sell-off.

The divergence between technology and other sectors denotes that investors are reassessing where future returns are most likely to emerge rather than abandoning equities indiscriminately. However, the scale of losses in semiconductors and the Nasdaq's growing number of new lows point to a broader deterioration in sentiment towards technology valuations.

Third-quarter earnings season remains an important test. Of the 111 S&P 500 companies that had reported, 83% exceeded analyst expectations, according to the latest LSEG data. That strong beat rate suggests corporate performance remains broadly resilient, but the reaction to Meta and Tesla underpins that meeting or exceeding earnings forecasts may not be enough when investors are concerned about future spending and cash generation.