Wall Street Jolted as Tech Stocks Plunge Amid AI Spending Skepticism

The recent optimism on Wall Street surrounding artificial intelligence (AI) investments was met with a harsh reality check, as the S&P 500 encountered its worst day since December 2022, with a substantial decline of over 2%. This downturn not only ended the market's longest stretch without a 2% drop since the onset of the global financial crisis but also underscored the fragility of the bullish wave that has been propelled, until now, by AI fervor.

A dramatic drop characterized the session for the Nasdaq 100, which tumbled over 3.5%. Tech giants such as Alphabet Inc. and Tesla Inc. were significant contributors to this downturn. Alphabet saw a 5% decrease after its substantial investments in AI did not sit well with analysts who had expected less aggressive spending. Meanwhile, Tesla suffered a 12% blow after reporting earnings that fell short of projections and announcing delays in their Robotaxi initiatives.

As investors recalibrate their expectations around the revenue-generating capabilities of AI, there's a marked shift toward smaller companies and diverse sectors, indicating a deliberate move away from mega-cap tech stocks. The yield curve also steepened on anticipation of a potential rate cut by the Federal Reserve.

Former New York Fed President William Dudley has even advocated for lower borrowing costs as early as next week's meeting, a sentiment that resonates with many analysts who worry that such a move may be an attempt to avert an impending recession.

Meanwhile, the Canadian dollar weakened as the Bank of Canada lowered rates, and the Japanese yen soared, signaling an undoing of carry trades. Amidst these market movements, prognostications about the 'So-So Seven', including Tesla and Alphabet, indicate an uncertain road ahead for tech megacaps.

This heavy rotation from large-cap tech stocks is attributed to increased anxiety over unsatisfactory earnings and the durability of this market repositioning. The equity correction might indeed be far from over, with Interactive Brokers' Jose Torres predicting a 10% to 15% correction this quarter.

Even as investors are cautioning themselves for more volatility and potential corrections in the S&P 500 and Nasdaq 100 benchmarks, the earning reports continue to roll in, leaving much to speculation. A signal to the intense scrutiny over AI investments and wider economic indicators is how the S&P 500 is performing relative to the 200-day moving average, an essential metric for investors.

The earnings season has seen a somewhat tepid start, with profit beats by S&P 500 companies at their lowest since 2025, and sales surprises faltering as well, indicating a broader market recalibration may be underway.

Despite the setbacks experienced by some tech giants, other companies like ServiceNow Inc. and Chipotle Mexican Grill Inc. have posted positive results, pointing to a mixed picture for corporate America. Nevertheless, the stock market continues to navigate choppy waters with investors keeping a close eye on the unfolding earnings season and macroeconomic signals.