Disappointing earnings from Google, Amazon, and Intel have visibly widened the cracks in the AI trade this week. On Friday (October 30), Intel shares plunged 29%, marking the largest single-day drop in the company's history. The Nasdaq Composite fell 2.9%, its worst day since June, and October is set to become the index's worst month in over a year.
For months prior, the risks of the AI trade were mainly borne by heavily indebted small companies, while the giants held Wall Street steady with their rich profits. This week, that changed: Google's search advertising growth slowed, Amazon's free cash flow swung sharply negative, and Intel projected a prolonged slump in PC sales. According to FactSet, the "Magnificent Seven" are expected to post third-quarter earnings growth below that of the rest of the S&P 500.
The question the market is asking has shifted from how big AI demand is to who will pay for AI. Rich Privorotsky, head of Goldman Sachs' Delta One desk, wrote: "The cost of capital has been objectively repriced, and there is no obvious solution."
Giant Earnings Fail One After Another
Earlier in the week, Anthropic's IPO filing showing surging revenue briefly lifted market sentiment, but the subsequent earnings from the giants poured cold water on the market.
Alphabet reported slowing search advertising growth, partly due to the impact of "AI Mode" queries, and said capital spending would increase "significantly" in 2027. Its shares fell 13% on Thursday, the worst single-day performance in its history, wiping out roughly $489 billion in market value, with major shareholders such as Berkshire Hathaway suffering heavy losses.
Amazon reported revenue after Thursday's close that missed expectations, with quarterly free cash flow at negative $33.5 billion — more than four times worse than expected. Capital spending surged to $77.3 billion, while new long-term debt of $48.1 billion was added over the same period. Its shares fell 7% on Friday.
Intel projected fourth-quarter revenue of $15 billion to $16 billion, below market expectations of $17.29 billion, and said it would not achieve positive cash flow this year. The company also expects a prolonged slowdown in PC sales, as the AI boom has driven up memory chip prices. Intel closed down 29% on Friday, with intraday losses reaching 29.7% at one point — the largest intraday decline since Bloomberg data began in 1982. The paper holdings of two major shareholders, the U.S. government and Nvidia, evaporated by more than $17 billion combined.
Microsoft saw Azure growth of 48%, but commercial orders fell 12%. About 12 hours after releasing earnings, the only tech company with a AAA rating launched a $25 billion bond offering, its first since 2017.
Friday's selloff spread across the entire tech sector: all of the Magnificent Seven closed lower, memory chip, semiconductor, and neocloud stocks fell sharply, Reddit dropped 26%, and Bitcoin fell more than 5%. Peter Boockvar, chief investment officer at OnePoint BFG Wealth Partners, said: "The cracks may not be connected, but when there are enough cracks, will the road eventually collapse?"
From "Demand Pays" to "Who Pays"
The giants were earning enough that the market had tolerated their heavy spending. Paisley Nardini, head of investment strategy at Tema ETFs, said that previously "spending represented confidence in this buildout and was rewarded," but "suddenly, spending is seen as a headwind."
The turning point began with Meta. On October 21, Meta announced fourth-quarter capital spending of $49 billion to $59 billion, reported negative free cash flow after dividends, and warned in its filing that it might need to "raise hundreds of billions of dollars" as early as the fall of 2026. On October 26, Meta launched an equity offering of up to $97.5 billion, with Nvidia, AMD, and Broadcom expressing interest in subscribing up to $5 billion. On the same day, Anthropic's S-1 filing showed compute bills of roughly $780 billion to $810 billion. According to Bloomberg, capital spending by the four tech giants this year will approach $750 billion, and "investors are no longer accepting returns at face value."
The credit market sent signals even earlier. From early September to mid-October, hyperscalers and AI-related companies did not issue a single investment-grade bond, and CoreWeave's unsecured bond spreads exceeded 1,000 basis points. This week, hyperscaler CDS hit new highs again; because Texas froze new projects, banks shelved a junk bond issuance for Anthropic's $15 billion Texas data center. Goldman Sachs credit strategists noted that AI default risk has tripled since January.
Ted Mortonson, a tech strategist at Baird, said the massive fundraising is good for Wall Street banks but has "scared fund managers out of their wits," adding: "My advice is to stay away for now." Keith Lerner, chief investment officer at Truist Advisory Services, said: "The bear case is that peak earnings are closer than we thought."
Violent Rotation Beneath the Index Surface
As of Thursday, the S&P 500 was still up about 0.9% for the month, just a few percentage points from its record high, but internal divergence was severe. The Nasdaq 100 fell about 3.3% this month, with component market value evaporating by more than $1.2 trillion. The Magnificent Seven fell more than 6% cumulatively in October, neocloud stocks dropped 37%, while Goldman Sachs' basket of stocks "most vulnerable to AI disruption" rose more than 15%.
On October 29, Google's plunge dragged the S&P 500 down 0.3%, even though 406 components advanced that day. According to Bloomberg data since 1996, in the previous 987 trading days when advancers numbered at least 400, the index closed higher without exception. UBS traders said capital is flowing from crowded AI and growth stocks into value stocks, small caps, consumer and rate-sensitive cyclical stocks, rather than leaving the stock market.
Institutional positioning contracted in tandem. Goldman Sachs prime brokerage data shows hedge funds sold tech stocks at the fastest two-week pace in over a decade, with net leverage in U.S. equities falling to a five-year low. Goldman's high-beta momentum portfolio has retraced 43% from its June peak, erasing its gains for the year. In Asia, Samsung Electronics and SK Hynix both fell more than 16% this month.
Rates, Iran, and the Midterm Elections
After the Fed hiked in September, the market expected further tightening; the Fed paused this month, but with two hawkish dissents. Fed Chair Kevin Warsh said this week: "Interest rates directly or indirectly affect almost everything... Market participants are distinguishing what investments they want to make."
Geopolitical risks are also rising. Trump hinted that the U.S. might launch new military action against Iran after next week's midterm elections. Brent crude front-month futures closed at $117.64 a barrel on Friday, near this year's high, after touching $118 intraday. Treasuries strengthened, with the 10-year yield falling below 4.9% to a six-week low, as the bond market increasingly views the oil price surge as a threat to economic growth. The midterm elections will also determine how much local opposition to data centers across the U.S. translates into development restrictions.
Optimists remain. Michael Monaghan, portfolio manager of the Founders 100 ETF, believes that if the Middle East situation stabilizes, the market will "rally sharply," and the upcoming Anthropic IPO "is the building block that holds the entire AI trade together." "We are bullish — the AI trade is not over."
But Privorotsky cautioned that the risk is that financing constraints will eventually force the giants to control capital spending, "it's just that we don't see that yet in their spending intentions."
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