Tech stocks plunge as investors question value of AI spending

Explainer

Technology stocks suffered a sharp sell-off Friday as investors grew concerned that Wall Street's frenzy around artificial intelligence had sent prices too high. The S&P 500 tumbled 1.8 per cent for its worst day since June and closed out a third straight losing week. The Nasdaq composite, heavily weighted with tech stocks, dropped a market-leading 2.9 per cent, while the Dow Jones Industrial Average fell 572 points, or 1.1 per cent. Canada's S&P/TSX composite index closed down 1.7 per cent. The weakness followed disappointing forecasts and reports of massive cash burn from several industry giants.

Intel led the decline, plunging 28.6 per cent for its worst single-day drop since 1974. The chipmaker forecast profit for the final quarter of the year that fell short of analysts' expectations, even as it reported a stronger profit for the latest quarter than expected. "The personal-computer industry continues to feel pressure," Intel CEO Lip-Bu Tan said. Amazon fell 1.4 per cent after reporting weaker-than-expected summer profit, and investors noted the company burned through $42.4 billion US in cash over the prior 12 months. It spent $94.8 billion US on property and equipment, primarily on AI technology.

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What triggered the sell-off?

The sell-off was driven by a combination of disappointing corporate forecasts and growing skepticism about the returns on massive AI investments. A day earlier, Alphabet's stock dropped more than 12 per cent to its worst day on record after telling investors it burned through more cash during the summer than the spring, citing mammoth AI investments. Nvidia, the chip company emblematic of the AI boom, fell 4.2 per cent and was the heaviest single force pulling the S&P 500 downward. "We're moving out of the hopes and dreams phase of the AI trade and into the 'show me' phase," said Joe Tigay, portfolio manager at Equity Armor Investments, in a note to investors.

Worries are rising about whether the hundreds of billions of dollars being spent on AI will produce enough profit and productivity to justify the investment. At the same time, stocks of computer chip companies and other beneficiaries of the AI data centre build-out have come under pressure on concerns that high interest rates may slow further expansion. In the cryptocurrency sector, stocks also tumbled following a hack on the world's biggest crypto exchange, Binance. Bitcoin's price fell toward $77,000 US from more than $86,000 US earlier this month. A U.S.-based blockchain intelligence firm said a North Korean unit was likely behind the attack that affected more than $6 billion US worth of crypto.

Which stocks held up outside of tech?

Outside the technology sector, stocks were more resilient as many companies rallied after reporting stronger summer profits than analysts expected. Nearly as many stocks rose in the S&P 500 index as fell. ExxonMobil climbed 2.2 per cent and Chevron added 1.8 per cent after the oil giants reported stronger profit. Mondelez International rose 3.9 per cent due to better-than-expected growth, and Colgate-Palmolive climbed 2.3 per cent after higher prices for its products helped it deliver better revenue and profit than expected.

Expectations remain high for U.S. companies' ability to grow profits, even as consumers globally feel discouraged by high inflation and fuel prices. Those expectations drove the S&P 500 to a record earlier this month. The U.S. stock market remains only 3.1 per cent below its all-time high, which has boosted the value of workers' 401(k) accounts, but it has become increasingly shaky days before Tuesday's midterm elections. Worries about AI have become a bipartisan concern for voters, and President Donald Trump has historically used the stock market's performance as a measure of his own success.

How did other markets react?

In the bond market, Treasury yields eased as investors sought safer assets. The yield on the 10-year Treasury fell to 4.93 per cent from 4.98 per cent late Thursday and from more than 5.30 per cent earlier this month. Yields fell even though oil prices bounced higher, which typically drives yields upward by worsening inflation. The price for a barrel of Brent crude oil rose 2.4 per cent to $113.43 US. In stock markets abroad, indexes were mostly lower in Europe following sharper swings in Asia.

South Korea's Kospi dropped 3.5 per cent as AI worries hit its tech-heavy market, while Hong Kong's Hang Seng climbed 1.5 per cent. Japan's Nikkei 225 fell 2.1 per cent after the Bank of Japan decided to keep interest rates steady, echoing moves made earlier in the week by the Federal Reserve and the European Central Bank. The S&P 500 closed at 7,580.07, down 140.32 points. The Dow closed at 51,770.31, down 572.25, and the Nasdaq composite sank 747.73 to 25,437.00.

With files from CBC News, BNN Bloomberg and ABC News