Meta and Microsoft's cost warnings underscore the risks associated with the AI trade, as evidenced by the futures slide.
The market's primary driver this year, megacap equities, were hit by a decline in Wall Street futures on Thursday as Meta Platforms and Microsoft issued cautionary statements regarding the increasing costs associated with AI.
Meta (META.O), which is owned by Facebook, experienced a 3.5% decline in its shares, while Microsoft (MSFT.O) reported a 3.9% decline in its shares in premarket trading. This was despite the fact that both companies exceeded their earnings estimates in the results that were released after the bell on Wednesday.
In anticipation of the publication of the Personal Consumption Expenditures index, the U.S. Federal Reserve's preferred inflation metric, markets were also on edge. This index provides the central bank with information on the extent to which it could reduce borrowing costs in the final two months of 2024. Additionally, the nonfarm payrolls data is due on Friday.
Meta issued a cautionary note regarding the "substantial acceleration" of AI infrastructure investments. Microsoft's Azure cloud business was expected to experience sluggish growth, indicating that the company's substantial AI investments were insufficient to address capacity constraints.
The other megacap equities, known as the "Magnificent Seven," also experienced a decline. Nvidia (NVDA.O), which shed 1.5%, and Alphabet (GOOGL.O), which shed 0.7%, relinquished some of their gains after experiencing a surge in the previous session following positive results.
Ahead of their quarterly results, which are scheduled to be released after the market close, Amazon.com (AMZN.O) and Apple (AAPL.O) experienced a 1% decline and a 0.2% decline, respectively.
Despite the fact that Wall Street achieved record highs this year by wagering on AI-driven tech stocks, the exuberance of investors has resulted in stocks trading at incredibly expensive valuations. The difficulties that companies encounter in satisfying investors are underscored by the warnings issued by Microsoft and Meta.
"The market is unforgiving of any AI-related company that fails to significantly outperform," stated Dan Coatsworth, an investment analyst at AJ Bell.
"Meta is the latest stock to feel the wrath of investors, despite extending its track record of doing better than analyst forecasts on key financial measures."
The Nasdaq 100 E-minis were down 180.75 points, or 0.88%, while the S&P 500 E-minis were down 43.25 points, or 0.74%. Dow E-minis were down 206 points, or 0.49%.
The VIX (.VIX), Wall Street's "fear gauge," has reached a record high of over three weeks as investors anticipate increased volatility in the coming weeks due to the impending U.S. presidential election, corporate results, and the central bank's November meeting.
October is expected to be the sixth consecutive month in which the benchmark index experiences gains, while the Nasdaq Composite (.IXIC) is expected to increase by over 2%. Conversely, the Dow (.DJI) is expected to experience a minor decline.
eBay (EBAY.O), an e-commerce company, experienced a 9% decline in value as a result of disappointing revenue projections. Robinhood (HOOD.O), a trading platform, experienced a 10.5% decline in value after its third-quarter earnings fell short of expectations. These actions were driven by results.
Uber Technologies (UBER.N) shares declined by 6.5% following the company's fourth-quarter gross bookings forecast, which fell short of expectations.
The cosmetics company withdrew its 2025 annual forecasts and reduced its dividend, resulting in a 16.6% decline in Estee Lauder's stock.
As of Wednesday, 77.4% of the S&P 500 companies that have reported results have exceeded analysts' expectations, which is approximately consistent with the 79% average beat rate of the past four quarters, according to LSEG data.