Alphabet shares plunge 12.6% after heavy AI spending spook investors

Alphabet shares suffered their steepest single-day decline in more than 20 years on Thursday, dropping 12.6% to pull the broader U.S. market into the red. The tech giant, which owns Google and YouTube, posted weaker summer growth than analysts predicted, intensifying fears that its massive artificial intelligence investments are outpacing returns.

The S&P 500 index fell 0.3%, ending a four-day winning streak. The Nasdaq composite slid 1.4%, while the Dow Jones Industrial Average lost 132 points. Despite these losses, the majority of stocks within the S&P 500 actually rose, indicating that Alphabet's performance alone dragged the benchmark down.

Investors reacted negatively to Alphabet's late Wednesday report, which showed the company burning through cash at a rapid pace. Property and equipment purchases, largely driven by AI infrastructure, exceeded $51 billion in the latest quarter. This cash drain has raised questions about whether the AI boom will generate sufficient profit to justify the heavy spending.

The anxiety surrounding Alphabet extends to the wider AI sector, where data center construction costs and rising borrowing rates are squeezing margins. The market is watching closely to see if the productivity gains from AI will materialize fast enough to offset the capital expenditure required to build the necessary hardware.

Other companies managed to post gains despite the heavy tech sell-off. KLA Corp, a semiconductor equipment maker, jumped 5.5% after reporting stronger profits than expected. Eli Lilly rose 6.6%, Mastercard gained 4.2%, and Merck added 3.8%. These firms demonstrated that strong earnings can still drive stock prices higher even when a major peer is under pressure.

DoorDash shares climbed 5.6% following an announcement that the company will acquire Instacart in a deal valued at $17 billion. DoorDash also beat analysts' expectations for profit and revenue in its latest quarterly report. Similarly, Norwegian Cruise Line Holdings surged 13.4% after reporting higher-than-expected summer profits, aided by increased spending by passengers on board its ships.

In the bond market, yields eased following a mixed bag of economic data. The yield on the 10-year Treasury note fell to 4.94% from 5.05% late Wednesday. This decline followed a period of volatility, with yields having previously touched their highest level since 2002 earlier in the month.

Economic reports showed that U.S. growth may have accelerated in the summer due to consumer spending and business investment in AI. However, income growth in September was weaker than forecast, and inflation measures worsened. Meanwhile, fewer workers applied for unemployment benefits, suggesting that layoffs have remained limited.

Oil prices also contributed to lower bond yields, with Brent crude falling 0.8% to $110.80 per barrel. In international markets, European indexes rose after the European Central Bank held interest rates steady. Christine Lagarde, the bank's president, announced she will resign in February, nine months before her term is scheduled to end.

Asian markets showed mixed results on Thursday. South Korea's Kospi index fell 1.2%, dragged down by a 4.1% drop in Samsung Electronics shares. The chipmaker's decline occurred despite a reported jump in its profits, highlighting the continued volatility in the semiconductor sector.