Wall Street ends lower as Alphabet revenue miss revives AI capex jitters

On October 29, US stocks experienced a decline as investors reevaluated big tech's substantial AI spending and took in high-profile earnings along with crucial inflation data following the Federal Reserve's decision to maintain interest rates steady. All three major US equity indexes saw losses, with the tech-heavy Nasdaq suffering the most significant drop after Alphabet announced lower-than-expected quarterly results on October 28.

Conversely, the small-cap Russell 2000 increased by 1%. Semiconductor stocks also faced a downturn, declining 1.4%, as investors tried to determine between companies that could fund their ambitious AI initiatives and those that were rapidly depleting cash and borrowing to accomplish their goals. Alphabet's share price plummeted 12.6%, contributing to the overall market downturn.

Ross Mayfield, an investment strategy analyst at Baird, noted that today's risk-averse market, with small-cap stocks outperforming, pointed to a lack of widespread concerns about the AI narrative. The Federal Reserve maintained interest rates during their October 28 meeting, stating that they would continue to gather more information before deciding on their next move.

Economic data released on October 29 confirmed that the US economy had grown faster than anticipated in the third quarter, although inflation pressures persisted due to a war-related oil supply crunch. Throughout the third quarter, 253 companies in the S&P 500 had reported earnings, with 81% beating analyst expectations, according to LSEG data.

Analysts now anticipate a 31% year-over-year increase in third-quarter S&P 500 earnings. Despite Alphabet's disappointing financial performance, Caterpillar exceeded profit estimates but maintained its growth targets. Eli Lilly's shares rose 6.6% after the pharmaceutical company raised its revenue outlook due to strong sales of weight-loss drugs.

Ford gained 12.4% after surpassing revenue expectations for the third quarter. Merck exceeded earnings forecasts driven by its cancer drug Keytruda and HPV vaccine Gardasil. Software stocks, however, faced broad weakness, with Fortinet and ServiceNow each falling more than 20% following their earnings reports. Marvell Technology declined 13.2% after reports suggested it was in advanced talks to acquire data-center optics maker Lumentum Holdings, though Lumentum's shares rose 0.6%.

On the NYSE, advancing issues outnumbered decliners by a ratio of 1.95-to-1, with 146 new highs and 201 new lows. The Nasdaq Composite saw 2,464 stocks rise and 2,308 fall, with 1.07 times as many advancing issues as declining ones.