727 FinanceWritten by Gao Zhimou
Earnings reports from Google, Amazon, and Intel successively disappointed the market, and this week the cracks in the AI trade widened noticeably. On Friday (October 30), Intel's stock price plunged 29%, the largest single-day decline in its history; the Nasdaq Composite Index fell 2.9%, its worst day since June, and October will also be the Nasdaq's worst-performing month in more than a year.
For several months prior, the risks of the AI trade were mainly exposed in heavily indebted small companies, while the giants kept Wall Street stable with abundant profits. This week, the situation changed: Google's search advertising growth slowed, Amazon's free cash flow turned sharply negative, and Intel expects a prolonged slump in PC sales. According to FactSet, the third-quarter earnings growth of the "Magnificent Seven" is expected to be lower than that of the rest of the S&P 500 constituents.
The question the market is pressing has shifted from how big AI demand is to who will pay for AI. Rich Privorotsky, head of Delta One at Goldman Sachs, wrote:
"The cost of capital has been objectively repriced, and there is no obvious solution."
Giant earnings reports successively falter
At the start of the week, the IPO filing submitted by Anthropic showed revenue soaring, which briefly lifted market sentiment, but the subsequent earnings reports from the giants poured cold water on the market.
Alphabet's search advertising growth slowed, partly due to the impact of "AI Mode" queries, and the company also said capital expenditure will increase "significantly" in 2027. The stock fell 13% on Thursday, its worst single-day performance in history, wiping out about $489 billion in market value, with major shareholders such as Berkshire Hathaway suffering heavy losses.
Amazon's revenue announced after the close on Thursday fell short of expectations, with quarterly free cash flow of -$33.5 billion, more than four times worse than expected; capital expenditure surged to $77.3 billion, while new long-term debt during the same period was $48.1 billion. The stock fell 7% on Friday.
Intel expects fourth-quarter revenue of $15 billion to $16 billion, below the market expectation of $17.29 billion, and said it will not achieve positive cash flow this year. The company also expects a long-term slowdown in PC sales because the AI boom has pushed up memory chip prices. Intel closed down 29% on Friday, with an intraday decline of as much as 29.7%, the largest intraday drop since Bloomberg data began in 1982. The paper holdings of its two major shareholders, the U.S. government and Nvidia, evaporated by more than $17 billion combined.
Microsoft's Azure grew 48%, but commercial bookings fell 12%. About 12 hours after the earnings release, this technology company—the only one with an AAA rating—launched a $25 billion bond offering, its first since 2017.
Friday's selloff spread across the entire technology sector: the Magnificent Seven all closed lower, memory chip, semiconductor, and neocloud stocks plunged, Reddit fell 26%, and Bitcoin dropped more than 5%. Peter Boockvar, chief investment officer at OnePoint BFG Wealth Partners, said:
"The cracks are not necessarily connected, but when there are enough cracks, will the road eventually collapse?"
From "paying for demand" to "who will pay"
The giants earn enough, and the market had previously tolerated their heavy investment. Paisley Nardini, head of investment strategy at Tema ETFs, said that previously "spending money represented confidence in this buildout and would be rewarded," while "suddenly, spending money is seen as a headwind."
The turning point began with Meta. On October 21, Meta announced fourth-quarter capital expenditure of $49 billion to $59 billion, negative free cash flow after dividends, and warned in its filing that it may need to "raise hundreds of billions of dollars" as early as autumn 2026. On October 26, Meta launched an equity financing of up to $97.5 billion, with Nvidia, AMD, and Broadcom expressing interest in subscribing for up to $5 billion. On the same day, the S-1 filing submitted by Anthropic showed that its computing bill was approximately $780 billion to $810 billion. According to Bloomberg statistics, the capital expenditure of the four major technology giants this year will approach $750 billion, and "investors are no longer accepting returns without question."
The credit market sent signals earlier. From early September to mid-October, hyperscalers and AI-related companies did not issue a single investment-grade bond, and the spread on CoreWeave's unsecured bonds exceeded 1,000 basis points. This week, hyperscaler CDS hit new highs again; because Texas froze new projects, banks shelved the junk bond issuance for Anthropic's $15 billion Texas data center. Goldman Sachs credit strategists pointed out that default risk in the AI sector has tripled since January.
Ted Mortonson, technology strategist at Baird, said that massive financing is good for Wall Street banks, but it has "scared fund managers out of their wits," and "my advice is to stay away for now." Keith Lerner, chief investment officer at Truist Advisory Services, said: "The bear case is that peak earnings are closer than we thought."
Sharp rotation beneath the index
As of Thursday, the S&P 500 was still up about 0.9% this month, just a few percentage points from its record high, but internal divergence was severe. The Nasdaq 100 fell about 3.3% this month, with constituent market value evaporating by more than $1.2 trillion. The Magnificent Seven fell more than 6% cumulatively in October, neoclouds fell 37%, while Goldman Sachs' basket of stocks "most vulnerable to AI disruption" rose more than 15%.
On October 29, Google's plunge dragged the S&P 500 down 0.3%, even though 406 constituents rose that day. According to Bloomberg data since 1996, in the previous 987 trading days with at least 400 advancers, the index closed higher without exception. UBS traders said funds are flowing from crowded AI and growth stocks to value stocks, small caps, consumer and rate-sensitive cyclical stocks, rather than leaving the stock market.
Institutional positioning also contracted in tandem. Goldman Sachs prime brokerage data showed that hedge funds sold technology stocks at the fastest two-week pace in more than a decade, and net leverage in U.S. equities fell to the lowest level in five years. Goldman Sachs' high-beta momentum portfolio has retraced 43% from its June peak, erasing its year-to-date gains. In Asia, Samsung Electronics and SK Hynix both fell more than 16% this month.
Rates, Iran, and the midterm elections
After the Federal Reserve raised rates in September, the market expected further tightening; this month the Fed paused rate hikes, but there were two hawkish dissents. Fed Chair Kevin Warsh said this week: "Interest rates directly or indirectly affect almost everything... Market participants are distinguishing between the investments they want to make."
Geopolitical risks are also rising. Trump hinted that the United States may launch new military action against Iran after next week's midterm elections. Brent crude front-month futures closed at $117.64 per barrel on Friday, near the year's high, after touching $118 intraday. U.S. Treasuries strengthened, with the 10-year yield falling below 4.9% to a six-week low, as the bond market increasingly views the oil price surge as a threat to economic growth. The midterm elections will also determine the extent to which opposition to data centers across the United States translates into development restrictions.
Optimists remain. Michael Monaghan, fund manager of the Founders 100 ETF, believes that if the Middle East situation stabilizes, the market will "rise substantially"; the upcoming Anthropic IPO "is the building block holding the entire AI trade together." "We are bullish; the AI trade is not over."
But Privorotsky warned that the risk is that financing constraints will eventually force the giants to control capital expenditure, "it's just that at present this is not yet visible in spending intentions."