AI Investment Fears Trigger Tech Selloff, S&P 500 Hits Two-Week Low
The S&P 500 tumbled to its lowest level in over two weeks on Thursday, while the Nasdaq Composite sank to a more than two-month low, as renewed pressure on the artificial intelligence theme rattled investors. The selloff was sparked by Alphabet's aggressive spending plans and Qualcomm's disappointing forecast, which cast doubt on the sustainability of sky-high tech valuations.
Tech Giants Under Pressure
Shares of Alphabet, the parent company of Google, fell 4.2% after announcing it would double its capital expenditure this year. This move signals another aggressive push to strengthen its position in the intensifying AI race, but it also raised questions about when returns on these massive investments will materialize.
Qualcomm slid 8.2% after forecasting second-quarter revenue and profit below analysts' estimates. The pressure quickly spread across other tech mega-caps, with Microsoft dropping 3.4% and Tesla declining 3.7%. Amazon, another member of the so-called "Magnificent 7" stocks, fell 4.3% ahead of its earnings report due after market close.
Broader Market Impact
The tech selloff deepened an already difficult week for the sector, with investors growing increasingly concerned that rapidly improving AI tools could start cannibalizing demand for traditional software products. This anxiety squeezed growth expectations across the entire technology landscape.
The S&P 500 software and services index slid 3.2%, marking its seventh consecutive session in negative territory. Since January 28, this sector has wiped out approximately $830 billion in market value. Individual software and data services stocks like ServiceNow and Salesforce fell 5% and 4% respectively.
Market Rotation and Volatility
As traders dialed back exposure to expensive AI-related stocks, they rotated into cheaper, overlooked corners of the market. The S&P 600 small-cap index, the S&P 500 value index, and the S&P 400 mid-cap index were all on track for weekly gains, even as the broader S&P 500 faced a decline of more than 2%.
The CBOE volatility index, often called Wall Street's "fear gauge," rose 3.8 points to 20.49, hitting its highest level in over two months. This spike reflected growing investor anxiety about market conditions.
Economic Indicators and Other Sectors
Amid the risk-off sentiment, precious metals resumed their slide, with silver plunging almost 13% after rebounding in recent days from a sharp drop. Bitcoin fell below the $70,000 mark, adding to the broader market unease.
On the economic front, the number of Americans filing new applications for unemployment increased more than expected for the week ended January 31. Meanwhile, job openings dropped to their lowest level in more than five years in December, suggesting some softening in the labor market.
Consumer staples, typically considered a defensive sector, was the only one of the S&P 500's 11 sectors trading in positive territory during the session.
Mixed Earnings Results
The earnings picture was mixed across different industries. Snap topped fourth-quarter revenue estimates, lifting its shares 10.8%. Tapestry rose 8% after raising its annual profit forecast, while Hershey added 8.8% on a better-than-expected annual profit outlook.
However, Estee Lauder shares fell 21.5% as the Clinique owner forecast annual results below estimates, demonstrating that not all consumer-facing companies were immune to market pressures.
Expert Perspective
Melissa Brown, SimCorp's managing director of investment decision research, commented on the shifting market dynamics: "The AI trade which was the accelerant last year is perhaps the extinguisher this year with people realizing that AI is going to help certain kinds of companies but it is also going to hurt, particularly software, for example."
She added, "Earnings were reported and not quite as good as investors had hoped for, that was a catalyst for a selloff."
Closing Market Numbers
At 11:07 a.m. ET, the Dow Jones Industrial Average fell 644.50 points, or 1.30%, to 48,856.74. The S&P 500 lost 95.74 points, or 1.39%, to 6,786.87, while the Nasdaq Composite dropped 401.99 points, or 1.76%, to 22,500.42.
The market's reaction to AI investment concerns highlights the delicate balance between technological innovation and financial sustainability, with investors now demanding clearer paths to profitability from companies making massive bets on artificial intelligence.
