Disappointing earnings reports from two major technology companies have once again sparked questions about whether the hundreds of billions of dollars invested in artificial intelligence will generate sufficient returns, bringing the recent global technology stock rally to a halt on Thursday.
Attention now turns to the Federal Reserve's preferred inflation gauge, the PCE data, which is due later today. As of press time, Dow futures were up 0.02%, S&P 500 futures were down 0.15%, and Nasdaq futures were down 0.92%.
In European markets, the Stoxx 600 index advanced 0.5%, with gains in energy and telecom stocks offsetting declines in banking shares. Oil company Shell saw its stock rise after announcing a significant increase in its share buyback program.
Spain's second-largest bank, BBVA, saw its shares decline due to lower profits in its domestic market. Dutch lender ING also fell after its third-quarter profit missed market expectations, weighed down by rising costs and higher provisions for bad loans.
The Dutch bank additionally stated it would cut approximately 400 employees as part of efforts to refocus its wholesale banking operations.
Technology sector under pressure
The technology sector came under pressure. Alphabet (ASX: GOOGL), Google's parent company, plummeted 11% in US premarket trading after its sales fell short of expectations, intensifying investor concerns that despite investing hundreds of billions of dollars in AI technology, the company may still be losing ground to AI competitors.
Meanwhile, Samsung Electronics dropped 4.1%, primarily due to the company not announcing a new shareholder return plan, weaker-than-expected chip business profits, and increased capital expenditure, all of which disappointed investors.
Software company stocks also faced selling pressure in premarket trading. Disappointing quarterly results from ServiceNow (ASX: NOW) and Fortinet (ASX: FTNT) further fueled concerns about the software industry's outlook amid rapid AI development. Fortinet shares plunged 25%, while an exchange-traded fund tracking the technology software sector fell 3.4%.
Jeremy Saltzberg, vice president and senior investment officer at Check Capital Management, said: "Investors are beginning to scrutinize the timeline for AI commercialization and the speed at which capital expenditure is consuming cash. Some investors are no longer permitting all hyperscalers to spend without limits without requiring them to demonstrate the value of these investments."
However, Microsoft (ASX: MSFT) shares rose 3.7% in premarket trading, supported by solid cloud business sales. Meanwhile, Oracle (ASX: ORCL) surged 11% after announcing long-term free cash flow projections and continued to climb in premarket trading. A measure of Oracle's credit risk also showed its largest improvement in nearly nine months.
At the same time, Marvell Technology (ASX: MRVL) is in advanced talks to acquire data center optical communications equipment maker Lumentum (ASX: LITE). Following the news, Marvell shares plunged more than 9% in premarket trading, while Lumentum shares rose 4.5%.
New cracks in the AI industry
The latest round of corporate earnings has exposed new fissures in the AI industry, with the market beginning to question whether massive investments in AI by technology companies can be converted into returns quickly enough to justify current high stock valuations.
Amazon is set to report earnings on Thursday, while Apple will release its results next week, outcomes that will further test investor confidence. As AI investment continues to expand, investors are increasingly demanding that companies prove large-scale capital expenditure can genuinely translate into stronger profit growth.
Chris Weston, head of research at Pepperstone, said: "The market is not questioning whether Alphabet has AI development opportunities, but rather questioning how much investors should pay for this opportunity when building AI infrastructure still has such a massive impact on cash flow. Investors remain willing to reward companies that can demonstrate AI is driving meaningful revenue growth, but if companies' spending, margins, and cash generation fall short of expectations, the market is becoming increasingly intolerant."
Fed's Warsh shows caution
The Federal Reserve kept interest rates unchanged on Wednesday as expected, deciding to defer further adjustments to borrowing costs until after next week's US midterm elections while waiting for more inflation data.
Fed Chair Kevin Warsh said at a press conference following the Federal Open Market Committee's decision to hold rates steady that no definitive conclusions could yet be drawn about the future path of monetary policy.
Jon Butcher, senior US economist at Aberdeen, said: "This rate hold appears to be merely a brief pause by the Fed to assess the economic situation ahead of a possible rate hike in December, rather than a signal that further monetary tightening is no longer necessary."
In bond markets, short-term US Treasuries rose for a second consecutive trading day after the Fed decided on Wednesday to hold off on raising rates. The two-year Treasury yield, which is more sensitive to rate changes, fell 2 basis points to 4.67%, while the 10-year Treasury yield dropped 3 basis points to 4.99%. European bonds also gained, with the German 10-year yield falling 2 basis points.
Eugene Leow, a strategist at DBS Bank in Singapore, said: "The market is essentially picking up a signal that Fed Chair Warsh is showing some signs of caution, which may be related to concerns about excessive AI optimism. Safe-haven demand and expectations of a potential slowdown in AI industry activity are putting downward pressure on bond yields."
December Fed rate hike "locked and loaded," another possible in March?
Fed Chair Warsh on Wednesday kept the Fed on track for another rate hike this year, though he insisted on refusing to provide any clear guidance on the future policy path. Within his self-imposed communication boundaries, Warsh conveyed to the outside world through his assessment of a strong economy and warnings about persistent inflation that the Fed's mission is not yet complete.
This stance reinforced market expectations that after holding steady on Wednesday, officials will raise borrowing costs in December and potentially hike once more in early 2027. For Deutsche Bank senior US economist Brett Ryan, Warsh's refusal to call financial conditions "tight," combined with his optimistic assessment of growth, effectively confirms the Fed's September projection of "one more hike this year." "He is saying they will tighten further, just not explicitly," Ryan noted.
Nomura research reveals "AI panic" retreat! Earnings delivery and capital flow relay resonance, AI computing theme leads tech stock counterattack
The latest research report from Nomura cross-asset strategist Charlie McElligott shows that AI-themed trades are emerging from a previous round of AI computing and technology growth panic amplified by concerns over surging AI financing costs, overcrowded positioning, and accelerated hedge fund deleveraging.
The strategist emphasized that large-scale AI financing being absorbed, chip giants and two major cloud computing giants broadly delivering strong results, and Anthropic's IPO filing disclosure have collectively alleviated the two-week "AI growth panic." The clearing of crowded positions and excessive leverage has also created conditions for market repair.
Stocks in focus
Google's parent company Alphabet (ASX: GOOGL) saw its shares plunge 11% after reporting earnings, with the company recording negative free cash flow of $9.07 billion. Core search business revenue came in at $63.35 billion, below analysts' expectations of $64.96 billion; total company revenue was $127.58 billion, also missing the LSEG estimate of $128.22 billion.
Despite Caterpillar beating Wall Street expectations on both third-quarter earnings and revenue, its shares still fell 9%. The company reported adjusted earnings per share of $7.20 on revenue of $20.68 billion; LSEG-polled analysts had expected EPS of $7.08 and revenue of $20.55 billion. However, sales in its construction machinery segment slightly missed market estimates.
DoorDash announced it would acquire Instacart parent Maplebear at $65 per share, an 11% premium to Maplebear's Wednesday closing price. DoorDash also reported third-quarter revenue and EBITDA that both exceeded expectations. Following the deal news, Maplebear shares rose 4.8% before being halted, while DoorDash shares gained 7%.
Eli Lilly, maker of weight-loss drugs Zepbound and Mounjaro, reported third-quarter earnings and saw its shares rise 4%. LSEG data showed adjusted earnings per share of $7.48 versus the consensus estimate of $6.26; revenue of $24.4 billion topped analysts' expectations of $22.61 billion.
Bloomberg, citing people familiar with the matter, reported that data center optical component maker Lumentum is in talks to be acquired by Marvell Technology, sending Lumentum shares up 5%; the large AI-related deal could be officially announced as early as next week. Marvell Technology shares fell more than 11%.
Microsoft (ASX: MSFT) reported first-quarter fiscal 2027 earnings, with both revenue and profit beating expectations, sending shares up 2%. Revenue came in at $92.28 billion, above the LSEG estimate of $90.69 billion; adjusted earnings per share were $4.89, beating analysts' expectations of $4.73. The company's core Azure cloud business saw revenue grow 48% year-over-year.
Shell reported third-quarter profit rose to $10.81 billion year-over-year, sending shares up 3.6%; LSEG-polled analysts had expected profit of $9.92 billion.
Norwegian Cruise Line beat expectations on both revenue and earnings, sending the cruise operator's shares surging 9.5%. According to FactSet data, the company reported adjusted earnings per share of $1.12 versus the consensus estimate of $0.93; revenue of $2.95 billion compared to analysts' expectations of $2.88 billion.
Chipotle Mexican Grill saw same-store sales beat expectations, sending shares up nearly 8%. Third-quarter same-store sales rose 2.1%, compared to the 1.5% increase expected by FactSet-polled analysts.
ServiceNow (ASX: NOW) shares plunged 20%. Third-quarter adjusted earnings per share came in at $1.00, below the LSEG consensus estimate of $1.02; fourth-quarter subscription revenue guidance ranged from $4.245 billion to $4.255 billion, against FactSet market expectations of $4.25 billion.
Cybersecurity firm Fortinet (ASX: FTNT) shares plummeted 25.5%. Third-quarter non-GAAP gross margin was 79.6%, compared to LSEG analysts' expectations of 80.1%; however, the company's overall revenue and profit results exceeded Wall Street expectations.
Grocery chain Sprouts Farmers Market saw its shares tumble 23% after third-quarter earnings per share, revenue, and same-store sales all fell short of analysts' consensus estimates.
Motorcycle manufacturer Harley-Davidson saw its shares fall 5% after its latest quarterly revenue missed expectations. Harley-Davidson reported revenue of $964 million, below the StreetAccount consensus estimate of $1.07 billion; however, adjusted EBITDA was $93.9 million, above the FactSet estimate of $78.9 million.
Crocs shares surged nearly 18% after the company's third-quarter results beat expectations and it provided current-quarter guidance above market expectations. Excluding special items, earnings per share were $3.69 on revenue of $1.04 billion; FactSet analysts had expected EPS of $3.31 and revenue of $1 billion.
eBay reported better-than-expected third-quarter results, sending shares up more than 6%. Revenue grew 14% to $3.2 billion, with gross merchandise volume rising 15%. Growth at its subsidiary platform Depop and accelerating GMV, combined with an upward revision to full-year guidance, further strengthened investor confidence in eBay's strategy.
Honeywell Aerospace raised its adjusted earnings per share guidance on a simulated standalone basis to $7.85-$8.00, sending the aerospace company's shares down 4%; the company also announced its first quarterly cash dividend of $0.40 per share.
Used car e-commerce company Carvana saw its shares rise 8%. Third-quarter revenue and adjusted EBITDA both exceeded Wall Street expectations; the company also stated that the Securities and Exchange Commission has concluded its investigation and will not take any enforcement action.
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