Index logs its worst month in over a year as market takes 'a major gut check'
By Hannah Erin Lang and David Uberti
Slowing growth. Dwindling cash piles. Cannibalized business lines. Pressure points are multiplying across the artificial-intelligence boom that has propelled markets and the economy.
The cracks in the AI trade widened through the week, culminating in a sharp tech selloff Friday that sent the Nasdaq composite to its worst day since June and its worst month in more than a year.
The vulnerabilities in Wall Street's favorite trade have been building for months, periodically appearing around smaller companies drowning in debt. Each time, the largest firms behind America's AI build-out have reassured Wall Street by printing profits, suggesting the show will go on even in a world of higher interest rates.
This week was different. After tech stocks had treaded water for weeks, AI giant Anthropic momentarily rejuvenated investors with a filing that showed soaring revenue ahead of its planned initial public offering. But then publicly traded tech firms reported earnings -- and markets got a reality check.
First came a dissatisfying quarterly report from Alphabet, which showed that growth in Google's search-advertising business slowed -- in part because of the impact of "AI mode" queries. Traders punished the stock with a 13% decline Thursday that marked its worst day on record, hammering major Alphabet shareholders such as Berkshire Hathaway.
Then the bad tech vibes got worse. Late Thursday, Amazon reported plunging free cash flow and revenue that missed analyst estimates. American chip-making giant Intel forecast a prolonged slowdown in personal-computer sales, pressured by memory-chip prices sent skyrocketing by the AI boom.
Intel shares on Friday crashed 29%, the worst session on record for a company that has traded on the U.S. stock market for decades. The plunge vaporized more than $17 billion in combined paper holdings by two of the company's largest shareholders: the U.S. government and Nvidia.
The losses bled across the tech sector: Every member of the Magnificent Seven ended the day in the red, while shares of memory providers, semiconductor manufacturers and neocloud companies also tumbled. Bitcoin prices, which often move in tandem with riskier stocks, slumped more than 5%. As the day wore on, the selloff gained steam, dragging the Nasdaq composite to a 2.9% drop on the day.
"Right now, we're seeing tremors in the ground," said Peter Boockvar, the chief investment officer at OnePoint BFG Wealth Partners. "You can't necessarily connect the cracks to each other. But when enough cracks take place, does that eventually lead to the road caving in?"
"It's a major gut check for the market," he added.
The selloff has left some investors warning that the pullback will continue -- and others waiting for expected IPOs by Anthropic and OpenAI to fuel the next leg of the rally. At the same time, next week's midterm elections could decide the extent to which data-center backlash nationwide translates to restrictions on development.
Since OpenAI's 2022 launch of ChatGPT kicked the AI race into gear, investors have often piled in indiscriminately, leaving indexes top-heavy with trillion-dollar giants. But the Federal Reserve's September rate hike -- and Wall Street's expectation of more to come -- has changed investors' calculus.
"Interest rates affect -- directly, or indirectly -- almost everything," Fed Chairman Kevin Warsh said this week. "You see market participants that are discriminating between the kinds of investments they want to make."
The specter of higher borrowing costs recently battered one of the riskiest corners of the AI trade, upstart companies including CoreWeave that rent high-end chips to train and run AI models. Still, many investors believed that Silicon Valley's larger cash-printing machines would be immune -- to the extent that some even sought shelter in megacap tech stocks as bond yields marched higher in September.
Now, traders are grappling with the prospect that AI-powered profit growth at the market's leading tech firms will only cool off from here. Following Amazon and Alphabet reports, the Magnificent Seven are now expected to report slower earnings growth for the third-quarter than the remaining members of the S&P 500, according to a FactSet analysis.
"The bear case is that peak earnings are closer than we thought," said Keith Lerner, chief investment officer at Truist Advisory Services.
Wall Street had been largely permissive of big spending until now because large companies printed cash to finance massive expenditures on chips, data centers and more. Until recently, "if you were spending, that shows conviction in this build-out. You get rewarded for spending money," said Paisley Nardini, head of investment strategy at Tema ETFs.
"All of the sudden," she added, "spending cash is seen as a headwind, not a tailwind."
Shrinking cash stockpiles have left tech giants turning to investors for help, from massive equity offerings announced by Alphabet and Meta in recent months to debt offerings across the sector ballooning to hundreds of billions of dollars a year.
"You have an enormous amount of capital raised. That's great for Wall Street banks," said Ted Mortonson, a tech strategist at Baird. For portfolio managers trying to gauge risks, he added, "it scares the living bejesus out of them."
Pointing to a potential peak in earnings growth and the threat of renewed U.S.-Iran fighting, he added, "My call is to get out of the way."
President Trump has signaled that the U.S. could launch new military campaigns against Iran after next week's midterm elections. That could raise the possibility of additional disruptions of energy supplies from the Middle East. Front-month Brent crude futures Friday closed at $117.64 a barrel, near their highest level of the year, as traders bet on additional price increases that would buoy U.S. inflation.
A durable end to the violence could do the opposite. "If we can land the plane and get stability in the Middle East, this market is going to absolutely rip," said Michael Monaghan, portfolio manager of the Founders 100 ETF.
Monaghan and many other investors were encouraged by Anthropic's filing to go public in the coming months, pointing to skyrocketing sales and a diversifying customer base. "In the Jenga puzzle, [Anthropic's IPO] is the block to hold up this whole AI trade," he said.
"There's enough pie to go around for now," Monaghan added. "We're bullish the AI trade isn't over."