US Stocks Fall as Alphabet’s AI Spending and Weak Amazon Outlook Deepen Tech Sell-Off

US stocks declined on Thursday as investors reassessed the scale and financial returns of Big Tech's artificial intelligence investments, with disappointing earnings from major technology companies adding to concerns about rising costs and the sustainability of the AI spending boom.

The Nasdaq Composite recorded the steepest decline among the major indexes, falling 1.37%, as Alphabet's quarterly results triggered a sharp sell-off in its shares. The S&P 500 dropped 0.30%, while the Dow Jones Industrial Average lost 0.25%. In contrast, the small-cap Russell 2000 advanced 1%, suggesting investors were shifting some capital away from large technology companies rather than withdrawing broadly from equities.

Alphabet's shares plunged 12.6% after the Google parent reported revenue below expectations and disclosed an acceleration in AI-related spending. The combination heightened investor concerns that the infrastructure required to compete in AI is becoming increasingly expensive, while the revenue generated from those investments remains uncertain.

The decline also weighed on the communication services sector, which fell alongside Alphabet. Semiconductor stocks lost 1.4%, ending a four-session winning streak as investors became more selective about companies positioned to benefit from AI infrastructure expansion.

The market reaction centered on the distinction between technology companies capable of financing their AI ambitions through operating cash flow and those relying more heavily on borrowing and external capital to fund expansion.

Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky, said the relative strength of smaller companies suggested that concerns about AI were not necessarily undermining the entire stock market.

"A risk-off day like this, with small caps outperforming, is a good sign that thus far the market's interpretation of cracks in the AI story doesn't mean cracks in every corner of the market," Mayfield said.

"There's plenty of other places to go with your money outside of the AI trade that have pretty decent prospects."

The sell-off followed a period of aggressive investment by major technology companies seeking to secure computing capacity, build data centers and expand AI services. Investors have generally rewarded companies that demonstrate strong AI demand, but the latest earnings reports are drawing greater attention to the cost of meeting that demand.

Alphabet's performance illustrates the tension. Its AI investments are intended to strengthen its competitive position in search, cloud computing, and other services, but the acceleration in spending has increased pressure on investors to assess how quickly those investments will generate sufficient returns.

The market's reaction is seen as an indication that revenue growth alone is becoming less persuasive when accompanied by substantial increases in capital expenditure and cash consumption. Investors are increasingly examining the relationship between AI-related spending, operating cash flow, margins, and future earnings.

The weakness extended beyond Alphabet. Software companies were among the market's poorest performers, with Fortinet and ServiceNow both losing more than 20% after reporting quarterly results. Their declines added to pressure on technology shares as investors scrutinized corporate performance and expectations for future growth.

Amazon also came under pressure after the market closed. Its shares fell 6.5% in extended trading after the company issued a disappointing fourth-quarter sales forecast, extending the negative reaction to technology earnings beyond the regular session.

The semiconductor sector faced a related reassessment. While demand for advanced processors, networking equipment and data-center components remains central to the AI investment cycle, investors are now differentiating between suppliers with strong financial positions and businesses that require significant borrowing to expand capacity.

Marvell Technology dropped 13.2% following media reports that it was in advanced discussions to acquire data-center optics maker Lumentum Holdings. Lumentum shares gained 0.6%. The contrasting movements suggested that investors were still evaluating the potential implications of consolidation in the AI infrastructure supply chain.

Inflation and Economic Growth Complicate the Fed's Rate Outlook

The technology sell-off came a day after the Federal Reserve held US interest rates steady, saying inflation remained elevated and that policymakers needed more information before deciding on their next move.

Economic data released on Thursday provided a mixed picture for investors. The first estimate of third-quarter gross domestic product showed that the US economy expanded faster than expected, indicating that economic activity remained resilient. However, inflation pressures also intensified, with higher oil prices linked to the war-related disruption in energy supplies feeding into broader price increases.

The combination complicates the outlook for monetary policy. Stronger economic growth can support corporate earnings, but persistent inflation may limit the Federal Reserve's ability to reduce borrowing costs. Higher interest rates for longer would increase financing costs for companies investing heavily in data centers and other capital-intensive infrastructure.

But the pressure is considered relevant to technology companies whose valuations depend on expectations of substantial future earnings. Higher discount rates can reduce the present value investors assign to those expected profits, while elevated borrowing costs make large investment programmes more expensive.

The Fed's decision to wait for additional information therefore leaves markets balancing two competing forces: an economy growing faster than anticipated and inflation that has yet to return to a more comfortable level.

Earnings Strength Beyond Technology Provides Some Support

Despite the declines in major indexes, corporate earnings have remained broadly stronger than analysts initially expected. With the third-quarter reporting season more than halfway complete, 253 S&P 500 companies had released results. Of those, 81% exceeded analyst expectations, according to LSEG data.

Analysts now expect aggregate third-quarter earnings for S&P 500 companies to have increased 31% year over year, according to the same data. That projection provides an important counterweight to concerns about technology valuations and the cost of AI investment.

Several companies outside the technology sector recorded positive market reactions on Thursday.

Eli Lilly gained 6.6% after raising its revenue outlook on strong sales of weight-loss medicines. The results reinforced the contribution of its obesity and diabetes drug portfolio to growth expectations.

Ford advanced 12.4% after reporting third-quarter revenue above expectations, while Merck gained 3.8% after beating earnings estimates on demand for its cancer treatment Keytruda and HPV vaccine Gardasil.

Caterpillar, however, fell 9.3% despite exceeding quarterly profit expectations. The heavy equipment manufacturer left its growth targets unchanged, disappointing investors looking for a stronger outlook.

These movements demonstrate that the market's response to earnings is relying on forward guidance rather than headline results alone. Companies can beat quarterly estimates and still face selling pressure when management does not raise expectations for future growth.

Market breadth also showed that Thursday's weakness was concentrated rather than universal. On the New York Stock Exchange, advancing stocks outnumbered decliners by 1.95 to one. The Nasdaq recorded a narrower ratio of 1.07 to one, with 2,464 stocks advancing and 2,308 declining.

The NYSE registered 146 new highs and 201 new lows. The S&P 500 recorded 19 new 52-week highs and six new lows, while the Nasdaq Composite posted 88 new highs and 191 new lows.

Trading volume reached 17.05 billion shares across US exchanges, slightly below the 20-session average of 17.09 billion.

The divergence between the major indexes and broader market performance suggests that investors were not abandoning equities across the board. Instead, the latest session exposed growing selectivity within the market, particularly toward companies whose valuations and expansion plans are closely tied to AI.