Nasdaq posts worst day since June as AI financing worries batter risk sentiment

Investing.com -- Wall Street saw a classic risk-off trading session on Thursday, as investors dumped high-growth communication services and technology stocks and flocked to the safety of defensive sectors and safe-haven U.S. Treasuries.

The artificial intelligence trade suffered, with chip stocks notching their worst day since June 23. Meta Platforms led AI hyperscalers lower, after the social media behemoth indicated a slight rise in capital spending forecasts and announced the establishment of a new class of nonvoting stock to raise capital for its AI ambitions.

Meanwhile, oil prices marched higher after fresh attacks by Iran-backed Houthis on Saudi Arabian energy facilities and airports stoked supply disruption fears.

The benchmark S&P 500 dropped 1.2% to close at 7,664.99 points, while the blue-chip Dow Jones Industrial Average ended flat at 52,866.85 points. The tech-heavy NASDAQ Composite was the hardest hit, dumping 2.6% to settle at 26,008.86 points, and posting its worst intraday performance since June 5. Get premium stock market insights with InvestingPro

The spotlight on Thursday was on worries about massive debt-fueled AI infrastructure spending, after Meta Platforms posted quarterly negative free cash flow, reportedly for the first time in a quarter since the social media giant went public in 2012. The cash outflow was a result of nearly $35 billion in capital expenditures for the quarter.

Meta stock concluded the session with a slide of 7%.

Moreover, a regulatory filing showed that Meta had operating and finance leases not yet included on its balance sheet valued at about $355.7 billion, including data center leases commencing during the remainder off this year through to 2036.

The filing also showed $454.5 billion of non-cancelable contractual commitments, comprising both short-term and long-term arrangements. The commitments include those related to third-party cloud computing power and energy agreements for data centers. Additionally, the AI hperscaler has obligations to purchase up to $14.7 billion of cloud capacity over five years.

Taken together, this means Meta has agreed to spend $824.9 billion in the future on its leases and contracts.

In its quarterly report, Meta guided for current-quarter revenue of $73 billion to $76 billion, with the top end of the range exceeding consensus estimates. The firm also narrowed its capital expenditures forecast to $135 billion to $145 billion. The low end of the outlook was previously $130 billion. Management did not provide much insight into spending beyond 2026.

The earnings report was overshadowed by the establishment of its proposed new class C common stock, which could have implications such as the potential economic dilution of existing shareholders if additional shares were to be issued in the future. The new class of shares could also unlock fresh financing for Meta to fund its AI ambitions.

"This is the most widespread selling of the AI trade we have seen all year. Meta Platforms appears ready to keep spending aggressively on its AI buildout, but it declined to provide capital expenditure guidance. Meta seems unlikely to do so until its new share class is approved, which may not happen until January," Michael O’Rourke, chief market strategist at Jones Trading, told Investing.com.

"Without that guidance, investors in AI infrastructure stocks lack the visibility they need for confidence. Investors who had positioned for an AI infrastructure rebound, betting on Mark Zuckerberg’s penchant for spending, were left exposed. The pressure on Meta’s shares may also encourage other hyperscalers to take a more cautious stance on capex, adding to the AI infrastructure weakness," he added.

Meta’s hyperscaler peers were indeed under pressure, with Microsoft, Oracle, Alphabet, and Amazon losing 2.2% to 4.6%.

Going into Meta’s earnings, concerns had surrounded the AI sector for several days, triggered by a combination of heavy debt-fueled spending on AI infrastructure and elevated borrowing costs. Roller-coaster movements in AI-exposed stocks had mirrored the shifting sentiment around AI.

"Markets have been shifting gears between ’Is the AI trade threatened by the sheer amount of credit needed to sustain it’ to ’The AI trade continues to march forward driven by an insatiable demand for a new innovation that will boost productivity,’" Michael Antonelli, market strategist at Baird Private Wealth Management, told Investing.com.

"Today we are dealing with the former after Meta reported," he added.

Away from the social media behemoth, shares of Tesla closed 3.1% lower. The Elon Musk-led electric vehicle manufacturer reduced its goal for per-year sales by the end of the decade to 5 million units, while investors eyed the potential for a blockbuster tie-up with Musk’s other company, SpaceX.

Previously, Musk had guided for annual sales of 20 million vehicles. However, Musk has appeared to back away from this goal in recent years, focusing instead on pivoting Tesla’s strategic focus to AI and robotics. Musk said the company is hoping to start shipping its Optimus humanoid robots to corporate customers by the end of 2027 and outlined plans for its autonomous taxis to become a major revenue source.

Cash flow was positive in the third quarter despite Tesla’s big investments on AI and robotics. Still, Tesla predicted that it would end up spending around $20 billion in capital expenditures this year, compared to a prior estimate of $25 billion.

In other earnings movers, Procter & Gamble advanced 5.6% and helped to cap losses in the blue-chip Dow. The owner of popular consumer brands such as Pampers, Tide, and Gillette reported quarterly organic sales growth of 4%, double that of Street expectations.

American Airlines reported Q3 results that exceeded analyst expectations but issued current-quarter guidance that fell short of estimates. Still, shares rose 3%.

Lockheed Martin notched quarterly results that surpassed estimates, as defense production accelerated across all business segments. The stock climbed 7%.

Spotify Technology premium subscribers grew by six million in the third quarter to 306 million, topping the audio streaming service’s previous guidance and surpassing Wall Street estimates. Shares in the Swedish group jumped 11.1%.

Turning to geopolitics, benchmark Brent crude futures hit an over five-month high after fresh attacks by Iran-backed Houthis on Saudi Arabian energy infrastructure and airports stoked supply disruption fears.

As per a statement posted by the Houthis, four military operations over the past 48 hours were conducted against Saudi Arabian targets, including the Ministry of Defense building in capital Riyadh, a Saudi Aramco site in Yanbu, and two separate airports.

Reuters reported that Saudi Aramco had told staff to evacuate its headquarters in Dhahran on the Gulf near Bahrain. The U.S. Embassy in Riyadh on Wednesday issued a security alert warning U.S. citizens of potential Houthi attacks on airports.

Separately, The New York Times reported that the U.S. and Israel had drawn up plans for renewed strikes against Iran after the U.S. midterm elections in November, targeting Iran’s energy infrastructure, nuclear facilities, and missile arsenal.

Brent was up 4% to $113.13 a barrel by 16:04 ET (20:04 GMT), while U.S. West Texas Intermediate crude futures added 2.3% to $99.40 a barrel.

Ayushman Ojha and Scott Kanowsky contributed to this article

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