By Sinéad Carew and Pranav Kashyap
(Reuters) -The S&P 500 and the Nasdaq Composite closed lower on Thursday, as Meta and Microsoft fell on worries over surging AI spending, while investors also digested a more hawkish tone from the U.S. Federal Reserve.
Meta shares plunged after the social media company forecast “notably larger” capital expenses next year, thanks to investments in artificial intelligence.
Microsoft shares also fell after the tech giant reported a record capital expenditure of nearly $35 billion for its fiscal first quarter and warned that spending would rise this year.
In contrast, however, Google-parent Alphabet rose as steady growth in advertising and cloud computing powered better-than-expected results.
The results followed the Federal Reserve’s delivery on Wednesday of a widely expected quarter-point rate cut but it raised doubts about future policy moves when Chair Jerome Powell said that another cut in December was not a “foregone conclusion.” This had led traders to pare back the odds of another cut in December to about 70%, down from more than 90% earlier in the week.
“Investors are in a risk-off mood after the market’s been on a run. The S&P 500’s near a record high but these technology earnings didn’t meet the elevated expectations,” said Lindsey Bell, chief strategist at 248 Ventures in Charlotte, North Carolina, also pointing to investor worries about the economic data vacuum due to the government shutdown and a more hawkish Fed.
Bell noted that neither Microsoft, Meta nor Alphabet “was able to significantly clarify when we’re going to get a return on the AI investments.” And she doesn’t see any better clarity from closely watched Apple and Amazon results, which are due after the closing bell.
Still, of the 222 S&P 500 companies that have reported so far, 84.2% have beaten earnings estimates as of Wednesday, according to LSEG data. That’s above the 77% average over the past four quarters.
According to preliminary data, the S&P 500 lost 68.43 points, or 0.99%, to end at 6,822.16 points, while the Nasdaq Composite lost 377.33 points, or 1.57%, to 23,581.14. The Dow Jones Industrial Average fell 113.38 points, or 0.24%, to 47,518.62.
Thursday’s pullback in the S&P and the Nasdaq came after the three major indexes notched record highs in the past four sessions, lifted by optimism around quarterly earnings and expectations for a more accommodative monetary policy stance.
Also, optimism around AI has been a key driver of the bull run in U.S. stocks this year, with the top tech companies collectively accounting for 35% of the weight of the S&P 500.
AI chip leader Nvidia fell on Thursday after it had given the market an extra boost on Wednesday, when it became the first publicly listed company to surpass $5 trillion in market capitalization.
Meanwhile, a widely anticipated trade agreement between U.S. President Donald Trump and Chinese President Xi Jinping appeared to do little to boost stocks on the day.
Trump agreed to roll back some tariffs on Chinese imports in exchange for Beijing resuming soybean purchases, keeping rare earth exports flowing, and cracking down on fentanyl trafficking.
“When you get good news and markets don’t react to it that tells you its probably already discounted,” said Jack McIntyre, portfolio manager at Brandywine Global.
In other stocks, drug distributor Cardinal Health rallied after raising its annual adjusted profit forecast.
Chipotle Mexican Grill shares tumbled after the burrito chain axed its annual sales forecast, with tariffs and inflation squeezing margins.
(Reporting by Sinéad Carew in New York, Pranav Kashyap and Nikhil Sharma in Bengaluru; Editing by Krishna Chandra Eluri, Shinjini Ganguli and Aurora Ellis)
