The artificial intelligence trade hit the skids on Friday, with stocks of some tech giants falling by double digits, as investors fretted about whether the industry’s debt-fueled spending spree still justified such high share prices.
Futures for the S&P 500 index were pointing to a decline of 1 percent when stocks resume trading in the last session of the month, with tech stocks heading for a deeper decline. Shares of Intel plunged after the chipmaker reported financial results that fell short of Wall Street’s expectations. Amazon’s stock fell 6 percent in premarket trading, after its earnings also missed analysts’ forecasts.
But in the face of this tech sell-off, the broader market has showed resilience in recent weeks, bolstered by strength in sectors like energy and utilities and in companies selling everyday goods. Exxon Mobil shares were up nearly 2 percent in premarket trading.
The S&P 500 is on course to post a small loss for October, extending a modest 0.5 percent loss in September. Still, the index remains only slightly below its record high.
For some investors, this is an important signal, helping allay fears that should the A.I. trade falter the entire market will fall with it. It points to investor confidence in sectors that for years had languished. And it shows how even as worries about some A.I. companies have intensified, money has not fled the stock market and is instead being redeployed within it.
“Money is sloshing around,” said Chris Galipeau, an economist at the Franklin Templeton Institute, the research arm of the asset manager. “We are still close to the all-time high.”
A.I. and technology stocks more broadly have been the backbone of the stock rally for years. But investors are increasingly questioning whether the A.I. industry’s lofty valuations are realistic, as worries mount about whether profit growth can keep pace with the expectations embedded in high stock prices.
This month, investors dialed down bets on some A.I. companies, leading to a flurry of sharp, volatile sell-offs. And as companies have reported financial results for the three months through September, investors have looked for more evidence from new, unproven A.I. businesses that their big bets are going to pay off.
The communication services sector has fallen almost 14 percent in October, led by losses for Alphabet and Meta, two of the companies at the forefront of the A.I. build-out.
Alphabet this week reported earnings that fell short of investors’ expectations, especially in light of the vast sums it is spending. Google’s parent company suffered its worst day in the stock market on Thursday, with its share price falling 12.6 percent and into negative territory for the year. Alphabet has slid roughly 30 percent since its peak in May, putting the company into a bear market, defined as a loss of 20 percent or more from a recent high.
Alphabet is one of five “hyperscalers” driving the A.I infrastructure build-out. Two of the others — Oracle and Meta — are also in a bear market. Amazon’s earnings report on Thursday sent its shares falling in after-hours trading. If that decline holds when the market opens on Friday, Amazon will also enter a bear market. That would leave Microsoft as the only one of the five with a stock price higher than where it started the year.
“A lot of conversations we’re having with clients is, ‘You’ve done well with A.I. because you were in the market or you were concentrated, but now it’s time to think about rebalancing and putting money elsewhere,’” said Joe Quinlan, head of market strategy for the Chief Investment Office for Merrill and Bank of America Private Bank.
Even A.I. companies that are seen as more restrained in their spending, and that surpassed earnings expectations, have struggled. Microsoft reported earnings that broadly beat investors’ expectations on Wednesday, but the company’s stock price still nudged lower on Thursday after it announced that it would raise a further $25 billion from bond investors.
“The earnings bar is very high,” Mr. Galipeau said. “We have seen what happens when companies don’t hit that bar.”
As investors have reduced their growth expectations, Treasury yields, which are sensitive to such expectations, have also fallen. The 10-year Treasury yield dipped back below 5 percent this week, having peaked at 5.3 percent earlier in October.
And that decline in Treasury yields, which represent the base-line government borrowing costs that underpin interest rates for consumers and companies, has helped lift some of the parts of the market that are more sensitive to interest rates.
Overall, nine of the 11 sectors of the S&P 500 have risen in October, with investors pouring roughly $60 billion into funds that buy U.S. stocks, according to data from EPFR Global, a research company.
Energy stocks have led the index higher, lifted by a renewed rise in oil prices that has bolstered the earnings of Exxon, Chevron and other major players in the industry. Brent crude, the international oil benchmark, rose to $113 per barrel, up from just over $102 at the end of September and around $72 just before the war with Iran started at the end of February. The energy sector of the S&P 500 has risen over 11 percent this month.
Stocks in utilities and consumer staples, two sectors that are seen as very sensitive to the path of interest rates, have risen over 9 percent in October. The Russell 2000 index of smaller companies, which fell over 11 percent from mid-August to mid-October, is on course to end the month roughly 2 percent higher.
Risks remain. The midterm election on Tuesday and the continuing war with Iran create uncertainty over the month ahead. Investors are also mindful that inflation could accelerate and Treasury yields rise again, reapplying pressure to the parts of the market that have risen this month while potentially slowing the A.I. expansion.
“Investors are essentially reallocating some of that A.I. capital into sectors that are more defensive for now, as they see how the A.I. trade plays out,” said Malik Ahmed Khan, a technology analyst at Morningstar.
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