US stock markets take a dip as big tech AI spending worries investors

US stock markets led by Nasdaq tumbled on Thursday after Microsoft and Meta earnings ignited investor concerns about the sector prospects amid rising AI costs.

The Nasdaq Composite, which is dominated by tech stocks, saw 2.3% of its value wiped out while the Standard and Poor 500 (S&P 500) sank 1.4%. The Dow Jones Industrial Average was heading for a month-end close in the red, as it saw losses of about 0.5% due to its major stocks realizing losses.

Microsoft and Meta weighed US stock markets

Microsoft and Meta quarterly reports saw the interest and prospects in the Big Tech stocks sink as investors were lukewarm to the results. Despite beating estimates by Wall Street economists and analysts, the two tech giants will continue to pump even more money into AI infrastructure which they have already poured money on.

Cost to revenue ratio which would increase pressure on profitability saw the shares of the two tech giants close the day trading lower.

As a result, there was a tech stock contagion as the feeling caught up with Amazon and Apple who are the last of the ‘Magnificent Seven’ stocks to report their quarterly earnings after trading hours of Thursday.

AI major benefactor and hot stock Nvidia, saw its value being 4% down in the session. Resultantly, yields of the 10-year Treasury bonds rose by 4.33% as a hedge to the AI cost-driven losses on Wall Street.

Baird Private Wealth Management investment strategist Ross Mayfield commented: “I think we are getting to the point where AI enthusiasm and potential is not enough.

“These companies, while they are still levered to those themes and hold favorable long-term growth profiles, are not quite delivering the growth that is priced into them,” said Mayfield.

Not all is doom and gloom as Alphabet sees bright prospects

This comes as Alphabet chief executive Sundar Pichai and his executives said their company benefited from heavy gains led by the increase in AI demand, and the outlook resulted in a rise in the company’s shares by over 5%.

Pichai said his company was realizing notable gains from the massive investments in AI, as demand for the technology has driven growth across Google’s search and cloud divisions.

Google Cloud AI infrastructure, generative AI solutions, and other key cloud products led to the division’s 35% year-over-year revenue increase to $11.4 billion in the third quarter.

“Alphabet is well positioned to lead in the evolving AI landscape, anticipating rapid innovation and progress in AI-driven products. There is a rise in Google Search usage among those engaging with its AI-enhanced overviews and noted that Google Lens now facilitates 20 billion visual searches each month,” said Pichai.

Personal Consumption Expenditures (PCE) index, the last key inflation input for the Federal Reserve before its policy decision next week was announced on Thursday. Annual PCE in the month of September rose by 2.7% more than the 2.6% expected by the market but in line with the 2.7% rise realized in August.

In the same period of September, initial jobless claims fell by 12,000, which left them at a five-month low of 216,000 against economists’ estimates of 230,000. The data was of investor interest, especially after the surge in October private payrolls affected the picture ahead of the crucial monthly jobs report due for release today.