Major US Stock Indexes Slide as Tech Shares Tumble on Worries of Surging AI Spending, Fed’s Hawkish Tone
The three major US stock indexes, including the Nasdaq Composite and S&P 500, fell significantly on Thursday due to a decline in tech shares and concerns over rising artificial intelligence (AI) spending. At the same time, investors were digesting a more hawkish tone from the U.S. Federal Reserve after it delivered a widely expected quarter-point rate cut.
The Nasdaq Composite dropped by 1.57%, with Meta’s shares plummeting 11.3% for their largest single-day decline in three years. Microsoft’s shares also fell, ending down 2.9%, as the software company reported record capital expenditure of nearly $35 billion for its fiscal first quarter and warned that spending would rise this year. In contrast, Alphabet, Google’s parent company, finished up 2.5% after reporting better-than-expected results driven by steady growth in advertising and cloud computing.
Tech Sector Earnings Disappoint, Casting a Shadow Over Market Sentiment
Investors were expecting elevated earnings from top tech companies, but the actual numbers failed to meet their expectations, contributing to the market’s downturn. Meta’s forecast of notable larger capital expenditures next year due to investments in AI was particularly concerning for investors. Microsoft’s warning that its spending would rise this year further added to the market’s risk-off mood.
"We are seeing a lot of disappointment from the tech sector," said Lindsey Bell, chief strategist at 248 Ventures in Charlotte, North Carolina. "Investors had high expectations, and the companies’ earnings didn’t meet those expectations." Bell attributed the decline in stocks to investor worries about the economic data vacuum due to the government shutdown and a more hawkish Fed.
Another factor contributing to market volatility was the lack of clarity provided by major tech companies regarding their return on AI investments. "I think investors are looking for answers from these big companies, saying when we’re going to see returns from all this AI spending," Bell explained.
Federal Reserve’s Hawkish Tone Raises Concerns Over Future Policy Moves
The Federal Reserve’s delivery on Wednesday of a quarter-point rate cut was widely expected, but the subsequent remarks by Fed Chair Jerome Powell raised questions about future policy moves. Powell stated that another rate cut in December was not a "foregone conclusion," which led traders to significantly lower their odds of an additional cut.
Market Reactions and Sector Performance
In response to disappointing earnings from major tech companies, investors opted for safer sectors such as real estate and consumer staples. On the other hand, some stocks managed to shine despite the overall market’s downturn. Amazon’s shares were a notable exception, rising 9% in late trading after reporting strong demand for its cloud computing services.
While Apple’s report showed strong iPhone sales, its supply constraints contributed to choppy after-hours trading. Among the S&P 500’s major industry sectors, seven declined on Thursday, with consumer discretionary leading losses and real estate being the biggest gainer.
The Dow Jones Industrial Average fell by 109.88 points (0.23%) to reach 47,522.12, while the Nasdaq Composite dropped 377.33 points (1.57%) to settle at 23,581.14. The S&P 500 declined by 68.25 points (0.99%), closing at 6,822.34.
Historical Context: AI’s Role in Buoying Market Sentiment
This market correction follows record highs achieved during the past four sessions due to optimism surrounding quarterly earnings and expectations of a more accommodative monetary policy stance. The resurgence of optimism was partly driven by growing recognition of the importance of artificial intelligence for top tech companies, which collectively account for 35% of the S&P 500’s weight.
AI Chip Leader NVIDIA Down Due to Market Expectations
Despite the overall market sentiment, some stocks stood out as a result of investor expectations. A day prior to the Nasdaq Composite’s decline, chip manufacturer NVIDIA had risen to become the first publicly listed company to surpass $5 trillion in market capitalization, only to fall 2% on Thursday.
In contrast, the widely anticipated trade agreement between U.S. President Donald Trump and Chinese President Xi Jinping appeared to have limited impact on stocks, as investors were already factoring this news into their expectations. According to Jack McIntyre, portfolio manager at Brandywine Global, "When you get good news, but markets don’t react to it, that tells you it’s probably already discounted."
Other Notable Stock Movements and Market Developments
The market’s slide was evident across various sectors as declining issues outnumbered advancers by a 2.1-to-1 ratio on the NYSE, where there were 177 new highs and 172 new lows recorded. However, the S&P 500 posted 34 new 52-week highs and 37 new lows.
In terms of trading volume, 20.32 billion shares exchanged hands compared to the average 21.08 billion over the past 20 sessions. Some stocks stood out amidst the decline in tech shares. Cardinal Health shares rallied by 15.4% on Thursday after increasing its annual adjusted profit forecast, while Chipotle Mexican Grill’s shares dropped 18.2% due to weaker sales growth.
Market and Economy Outlook: Investing in Challenging Times
In times of market volatility, making informed investment decisions has become increasingly challenging. The question arises as to whether popular stocks are fairly valued or potentially undervalued, offering opportunities for substantial returns during the correction process.
Advanced AI algorithms have analyzed thousands of stocks, identifying undervalued gems that could rise by 50% or more in the future. Investing pro’s expertise provides valuable insights into which companies might be poised for growth, like the recent surge experienced by several identified undervalued stocks.
To capitalize on these opportunities, investors must carefully assess market trends and sector performance to make informed decisions.
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