Nasdaq Falls 1.4% as Concerns Mount Over Alphabet’s AI Spending
Key Facts
The Nasdaq Composite fell 1.4% in Thursday trading, while the S&P 500 slipped 0.4% and was on track for its first loss in four days, according to the Associated Press. Technology shares came under pressure after Alphabet’s results reignited concerns about the cost and returns of its AI investments. Nasdaq 100 futures fell about 1% on Thursday morning, according to a Reuters report, as markets digested the Federal Reserve’s decision to hold rates steady. Attention focused on Alphabet after its results showed weaker-than-expected summer growth. The impact extended to investors’ assessment of the heavy spending on infrastructure needed to develop AI services.
Alphabet shares fell 12.5% on Thursday and were on track for their worst performance since beginning to trade more than 20 years ago, according to the Associated Press. The shares had fallen more than 10% in extended trading after the results were announced on Wednesday, Reuters reported. The agency said the report showed weaker-than-expected summer growth and revived questions about whether large AI investments would pay off. The company reported total revenue of $127.6 billion in the third quarter, up 25% year over year. Google Cloud revenue also rose 103% to $30.7 billion, a strong performance that did not dispel concerns about the scale of spending and the ability to turn it into cash.
Cash flow data show another side of this divergence: Alphabet posted negative free cash flow of $9.07 billion in the third quarter, compared with cash burn of $5.9 billion in the previous quarter, according to Reuters. The agency attributed this to higher spending, noting that purchases of property and equipment exceeded $51 billion in the latest quarter. The widening negative free cash flow means the market is watching the impact of capital expansion alongside revenue growth, not revenue alone. Chief Financial Officer Anat Ashkenazi said, "Capital expenditures, driven by AI, will increase significantly in 2027." She added that the capital expenditure outlook for the current year was unchanged, according to Reuters.
Technology’s decline came as the Federal Reserve did not raise interest rates, with the Federal Open Market Committee keeping its target range at 3.75% to 4% in its October 28 decision. The decision passed by 10 votes to 2, according to the central bank’s statement. Lisa Cook and Beth Hammack dissented, preferring to raise the target range by a quarter of a percentage point. The statement said, "Economic activity has been expanding at a solid pace," while also noting that "inflation remains elevated." The decision sets out the committee’s actual stance at this meeting, while the split vote reflects disagreement within it over the appropriate move as it assesses the economy and inflation.
Microsoft’s results, by contrast, offered a different reading of performance among major technology companies: its shares rose about 3.6% in premarket trading on Thursday after it reported strong quarterly results and forecast strong growth in cloud services, according to Reuters. The agency noted that the company delivered better-than-expected cash flow, supporting its shares despite pressure on futures. The previous Tuesday’s session had seen the Nasdaq Composite rise 1.2% to 26,477 points, according to data cited by Kiplinger, before Alphabet’s results reshaped the trading direction. The companies’ divergent performances put cloud-services growth against investor questions about infrastructure costs and the cash returns on AI investments. The available data did not include a verified closing price for Apple, Microsoft or Meta.
Investors are turning their attention to economic data that could offer further signals on the path of monetary policy; they were awaiting the September personal consumption expenditures report and the third-quarter gross domestic product reading, according to Reuters. In its October meeting statement, the Fed described economic activity as expanding at a solid pace and inflation as remaining elevated, while at its September meeting it cited rising risks on both sides of its dual mandate. The next monetary policy milestone is the committee’s meeting on December 8 and 9, 2026, with a press conference scheduled for December 9, according to the Fed’s calendar. The October decision does not determine the outcome of the next meeting; it keeps the current range in place while recording the objections of two members who preferred a hike. The inflation and growth data expected before the December meeting will be among the factors investors watch to assess the economic backdrop for the decision.