Wall Street's hopes for a tech-led boost, pinned in part to the AI investment theme, are starting to fade, as the biggest names fall short of expectations and the broader market starts to look worryingly soft headed into the final months of the year.
Alphabet's stunning Thursday slump, putting the Google parent on pace for its worst day on record, combined with modest declines for megatech rival Microsoft to send stocks sharply lower.
The S&P 500, in fact, is on pace for a modest October gain of 1%, following a 0.45% decline in September. The Nasdaq Composite, meanwhile, has fallen 2.2% this month.
The disappointing results from the Magnificent Seven giants reporting so far, and the lack of a clean read on the AI trade from those set to report over the coming weeks, suggests a good portion of Wall Street's most important narrative -- that AI is an unstoppable force -- is starting to lose its grip over markets.
And with major issues developing in the background, such as the war with Iran, a Federal Reserve that's likely to be forced into rate hikes, and a U.S. consumer that is starting to feel the effects of faster inflation and lingering job insecurity, stocks face a challenging path into the fifth year of the current bull market.
"The AI trade is not necessarily broken, but it is broadening from a capital-spending story into an execution and monetization story," said Chris Osmond, chief investment officer at Fifth Third Wealth Advisors. "That is a healthier development over time, although it may create greater volatility and more differentiation among the largest tech companies."
Richard Reyle, chief investment officer at Questar Capital Partners in Paramus, N.J., thinks the tech trade has hit an inflection point, "which is bound to create winners and losers."
"We are now getting to see who is spending rationally on AI and who isn't," he said. "The takeaway from tech earnings season is simple: increases in capex spending and massive share issuance trigger an investor exodus from the stock."
The S&P 500 Technology Select Sector Index has fallen nearly 3% over the past month, and is down around 4.8% from its early June peak. That's kept the benchmark in check for much of the same period, with the S&P 500 rising just 1.4% over the past five months.
And this third quarter earnings season simply hasn't added any acceleration to that tepid performance. Just over halfway through reporting, LSEG data suggests companies are topping Street forecasts by 4.5%, well shy of the fourth quarter average "surprise factor" of around 7.7%.
The tech sector's surprise factor, according to LSEG data, sits at 4.7%, while the communications services sector, which houses Alphabet, is pegged at -1.5%.
That's not to say the numbers aren't impressive: tech is likely to contribute around half of the overall earnings tally of $775 billion for the S&P 500 this quarter, with a similar share penciled in for the final three months of the year.
But it's not packing the extra punch that it once was. And that's worrying.
"Our base case is that the surge in S&P 500 earnings since the start of the AI revolution (in November of 2002) won't continue next year," said John Higgins, chief economic advisor for financial markets at Capital Economics. "Indeed, we suspect it will partly reverse, undermining the index in the process.
"Considering how tech, and the AI trade writ large, have held up U.S. markets over the past four years, that in itself would be worrisome," he said. "Adding in the energy price turmoil from the war with Iran, and its sustained pressures on inflation, makes it even more so."
The Fed was able to tap dance around an October interest-rate hike this week, but the inflation numbers, and the solid pace of GDP growth reported for the third quarter and expected into the end of the year, won't allow that in December.
"Growth is strong, private domestic demand is stronger still, layoffs remain low, and inflation remains elevated," said Jim Baird, chief investment officer at Plante Morgan Financial. "What more do you need to see to tighten further?"
And oil prices, already firmly north of $100 a barrel, could climb even higher if the U.S. and Israel opt for further, more damaging strikes on Iran once next week's midterm elections have passed.
And that midterm slate might have more potential to rock markets than traditional risk gauges currently suggest. Polling points to a notable swing that will see Democrats retake the House, with a Senate majority still in question.
"We see a split as a neutral to modestly positive event for the stock market, a Democratic sweep as a neutral to negative event, and a Republican sweep as a positive event," said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.
"But it will be important to keep an eye on turnout and exit polling on the reasons why voters cast their ballots in one direction or another," she added.
That leaves a notable series of potential headwinds to a market that has, for much of the past four years, been reliant on tech to sail through them.
History suggests that end of year momentum is on the side of the bulls, but Thursday's gain of 0.28% for the S&P 500 was around half of the benchmark's long term performance on Oct. 28, the market's best day of the year since 1959.
That leaves a lot of work to do over the 44 trading days that sit between now and the end of the year. If the S&P 500 is to reach the 8000 point mark, a level Wall Street has firmly penciled in, it will need to generate a daily gain of around 6.8 points. Thus far this year, that gain's been around 4.4 points.
And with tech and the AI trade fading quickly, that might be a bit too much to ask from a market that's running on fumes.
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