Major U.S. stock indexes closed lower Thursday after Microsoft and Meta Platforms highlighted growing artificial intelligence costs that could hit their earnings, curbing enthusiasm for megacaps that have fueled the market rally this year.
Shares of Facebook-owner Meta Platforms and Microsoft fell, despite both companies beating earnings estimates in results reported after the bell on Wednesday.
Other so-called Magnificent Seven megacap technology stocks also slipped. Amazon.com and Apple dropped ahead of their quarterly results, due after the market close. Shares of Alphabet, which reported on Tuesday, also fell.
"You had three of the Magnificent Seven all say they basically have open-ended budgets for AI spend and investors don't like to hear that," said Carol Schleif, chief investment officer at BMO Family Office.
"The intermediate and longer-term implications of this buildout are really important for U.S. long-term growth and long-term productivity. ... In the short run, investors are asking where's the profit from it?"
Microsoft and Meta both said their capital expenses were growing due to AI investments, which could reduce profitability.
According to preliminary data, the S&P 500 lost 110.39 points, or 1.90%, to end at 5,703.28 points, while the Nasdaq Composite lost 522.07 points, or 2.81%, to 18,085.86. The Dow Jones Industrial Average fell 380.02 points, or 0.93%, to 41,761.52.
The Personal Consumption Expenditures price index, the Federal Reserve's preferred inflation metric, rose 0.2% in September, in line with economists' expectations. However, the core figure was 2.7% year-over-year, slightly above the 2.6% forecast, while consumer spending increased a little more than expected.
After the data, traders stuck to bets for a 25-basis-point rate reduction in the Fed's November meeting.
"We do expect them to cut by a quarter next week because there is nothing in the data this week that should throw them off of that," Schleif said.
Information technology led declines among sectors, but upbeat results from ConocoPhillips and Entergy lifted energy and utilities.
An index of chip stocks fell, led by plunging shares in Monolithic Power Systems after the maker of power control products and semiconductors used in vehicles reported its results. Nvidia also dropped.
The VIX, Wall Street's "fear gauge," ticked up as investors braced for more volatility in the next few weeks from corporate results and the Nov. 5 U.S. presidential election followed by the Fed's policy-setting meeting.
Estee Lauder slumped, on track for its worst day on record, after the cosmetics company withdrew its 2025 annual forecasts.
Shares of Uber Technologies plunged after the ride-hailing company forecast fourth-quarter gross bookings below expectations.
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