AI enthusiasm is collapsing and tech earnings made it worse

(Bloomberg) -- The last two weeks were supposed to bring some clarity to a stock market wobbling on a series of risks, particularly doubts about heavy spending on artificial intelligence, as a series of technology giants reported their earnings.

After seeing the numbers, the outlook is clearer. Unfortunately for Wall Street, it's also considerably darker.

While earnings from the big AI spenders showed cloud-computing is still booming, investors weren't impressed. Rather, they were focused on the mounting costs of the data center build out that's eating into free cash flows, which triggered a steep selloff on Friday that pushed the tech-heavy Nasdaq 100 Index's October decline to 6.7%, its worst month since the tariff freakout in March 2025.

"This is a reflection of investors becoming more discerning, because I don't think every hyperscaler is going to be a winner moving forward," said Anthony Saglimbene, chief market strategist at Ameriprise. "It is all going to come down to, what are companies spending, how much are they getting back, and how deep are their moats, such that they can continue growing revenue."

Alphabet Inc. shares plunged 13% on Thursday, their worst day ever, after Google's parent reported disappointing sales in its core search business and a second straight quarter with negative free cash flow, something it has never done as a public company. Amazon.com Inc. followed with a report showing significantly worse negative free cash flow than analysts had anticipated due to higher capital spending and the slowest growth in its e-commerce business in three years. The stock sank 5.6% on Thursday and Friday, its worst two-session performance since July.

"Investors are assigning more risk to the companies that are cash flow negative," said Brian Mulberry, chief market strategist at Zacks Investment Management. "I do think that you're seeing investors vote with their wallet in ranking what quality means to them."

The AI trade actually entered the week on the back foot, as Meta Platforms Inc. showed a sizable jump in its capital spending plans for the year in its earnings report on Oct. 21. Since then, the stock is down 12%. A gauge of the company's credit risk jumped to the highest on record. And late Friday, S&P Global Ratings lowered the credit rating outlook for Facebook's parent to negative from stable, noting that it's unclear when Meta's expenditures will generate revenue that exceeds the rising costs.