Why Alphabet’s stock could see its worst drop in years after the latest results

U.S. stock index futures experienced a decline on Wednesday, primarily driven by Alphabet's (Alphabet's parent company) sharp drop following its third-quarter earnings that fell short of expectations. Microsoft experienced gains in the aftermath of its earnings, which exceeded projections. The Federal Reserve's remarks, which suggested potential interest rate hikes in the future, also influenced market sentiment.

The Nasdaq 100 Futures dropped by 1.2% to 29,619.50 points, while the S&P 500 and Dow Jones Futures fell by 0.5% and 0.06%, respectively. Despite a mildly positive start on Wall Street, driven by strong earnings from memory chip company SK Hynix (SKHY), tech stocks suffered due to Alphabet's disappointing results. Alphabet's stock plummeted by 9.8%, underperforming compared to other tech giants.

The company's profit missed expectations, largely due to consistent spending on artificial intelligence and data center infrastructure. Investors were concerned about whether significant investments in AI would yield sufficient returns, a sentiment that had negatively impacted tech stocks since late September. Alphabet’s earnings release further fueled apprehension about this issue.

Microsoft, on the other hand, rose by 2.7% after reporting impressive earnings, with its Azure unit growing beyond expectations, indicating progress in monetizing AI. Both Alphabet and Microsoft are among the major spenders on AI infrastructure, providing valuable insights into the sector's performance and potential returns. Amazon, another major player in the hyperscaler category, is set to release its third-quarter earnings on Thursday.

The Federal Reserve maintained interest rates at 4.0% in its latest meeting, as anticipated, with some committee members advocating for a 25-basis point increase. Fed Chair Kevin Warsh, during his remarks, highlighted economic strength but refrained from providing future guidance on interest rates. He reaffirmed the central bank's commitment to achieving a 2% annual inflation target.

While Warsh's comments were interpreted as hawkish, with rising Treasury yields, the market also considered a potential 25-basis point hike in December, as indicated by CME Fedwatch, which now stands at 83.5%. The upcoming GDP and PCE data will likely influence the Fed's decisions on interest rates.