Stocks finished mixed today, with the Dow essentially flat, S&P 500 falling 1.21%, Nasdaq dropping 2.60%, and Russell 2000 gaining 0.11%. Those headline numbers, however, don’t tell the whole story. More stocks actually rose than fell, and the equal-weighted S&P 500 finished higher, outperforming the traditional S&P by nearly two percentage points. Consumer staples, utilities, healthcare, financials, homebuilders and transportation stocks were among the stronger areas. The weakness was concentrated in technology, particularly semiconductors, memory and the largest AI-related companies. Meanwhile, Treasury yields fell sharply, while WTI crude jumped 2.4% as Middle East tensions intensified.
Meta Captures the Market’s AI Dilemma
Meta’s earnings offered a nearly perfect example of the debate currently surrounding AI. The company’s underlying business performed well. Revenue and advertising growth exceeded expectations, fourth-quarter guidance was strong, and AI continues to improve both user engagement and the effectiveness of its advertising products.
Yet Meta shares fell 7%. Why? Investors are increasingly focused on what it will cost to sustain that growth. Meta expects to continue investing aggressively in AI infrastructure and has indicated that its future capital needs could be enormous. That creates an interesting situation. AI is already helping Meta’s business but investors are questioning how much the company must spend to keep those benefits growing. That same debate is increasingly playing out across the technology sector.
Strong AI Demand Isn’t Enough Anymore
Recent earnings continue to suggest that underlying AI demand remains extremely strong. Texas Instruments highlighted continued data-center strength. Lam Research remains positive about AI-driven semiconductor demand despite supply constraints. SAP pointed to AI helping drive cloud migrations. Earlier this week, SpaceX and Super Micro Computer also provided strong evidence of growing demand for computing capacity.
So the recent technology selloff isn’t primarily about disappearing demand. Instead, investors are asking a different question: How much are companies going to spend to capture that demand and what return will they eventually earn on that investment? That’s a much higher standard than simply showing that AI-related revenue is growing. After the extraordinary gains many AI stocks have experienced, the market increasingly wants evidence that massive capital spending will translate into equally impressive cash flows.
The Rest of the Market Is Doing Better
Today also provided another encouraging signal underneath the headline indexes. While the Nasdaq fell sharply, the average stock performed considerably better. Consumer staples, healthcare, utilities, transportation companies and financials all found buyers. Several earnings reports reinforced that broader strength. Procter & Gamble reported better-than-expected organic growth. Railroads CSX and Union Pacific pointed to improving industrial activity. Airlines continued to report healthy travel demand despite higher fuel costs. Lockheed Martin reported a record backlog.
Initial jobless claims also fell to 194,000, the lowest level since July, suggesting the labor market remains relatively healthy. Taken together, the broader economy doesn’t appear to be experiencing the kind of deterioration that today’s Nasdaq decline might imply. This continues to look more like rotation away from crowded technology trades than investors abandoning stocks altogether.
Falling Yields Help the Broader Market
Treasury yields also declined sharply today, particularly at the shorter end of the curve. Markets now see only about a 13% probability of another Fed rate increase in October, with expectations increasingly shifting toward December. Lower yields helped rate-sensitive areas such as utilities and homebuilders.
That’s important because falling interest rates can broaden market participation beyond the cash-rich technology companies that dominated much of the year. But there is a complication. Oil rose another 2.4% as geopolitical tensions in the Middle East intensified. If crude continues climbing, higher energy costs could eventually make the Fed’s inflation problem more difficult again.
Here’s Our Take
Today’s market looks much worse if you only look at the Nasdaq. Underneath the surface, the picture was considerably healthier. More stocks rose than fell. Small caps finished higher. The equal-weighted S&P gained. And several economically sensitive industries reported solid earnings. That tells us the market isn’t simply moving into broad risk-off mode. Instead, investors appear to be reassessing one of the year’s most crowded trades. And Meta’s earnings help explain why.
AI is producing real benefits. Demand for computing power remains enormous. Companies are seeing better engagement, advertising performance, cloud adoption and productivity. But the cost of building the infrastructure necessary to support that growth is also becoming enormous. That changes the investment question. It is no longer enough to ask, “Who benefits from AI?”
Investors increasingly need to ask, “Who benefits enough to earn an attractive return on all the capital being invested?” That’s a much more demanding test. The encouraging part is that while technology works through that adjustment, other areas of the market are beginning to participate. If that broadening continues, the market could become healthier even if some of its largest AI winners experience more volatility. For investors, the next phase may therefore be less about abandoning AI and more about becoming increasingly selective while looking beyond AI for opportunities elsewhere in the market.
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