AI Costs Weigh on Megacaps on Wall Street

The New York Stock Exchange was not in good shape on Thursday, as alarming announcements from Meta Platforms and Microsoft regarding rising costs associated with artificial intelligence (AI) dampened confidence in the hitherto thriving megacap companies. The stock of Facebook parent Meta dropped by 4% and Microsoft lost 3.7% in pre-market trading, even though both companies surpassed analyst estimates with their latest quarterly results. Tension was in the air ahead of the release of the personal consumption expenditures index, the Federal Reserve's preferred inflation indicator, which could reveal to what extent the central bank might adjust borrowing costs in the last two months of the year. Additionally, data on non-farm payrolls is set to be released on Friday. Investors were particularly attentive to Meta's statements about a substantial acceleration of investments in AI infrastructure and Microsoft's forecast of slower growth in the Azure cloud business. This indicates that the companies' significant AI investments made to date are insufficient to keep up with capacity demands. While the focus on AI-driven tech stocks led to records on Wall Street this year, these stocks are now highly valued. The warnings from Meta and Microsoft highlight the challenge of meeting investor expectations. "The market does not forgive any AI company that does not significantly outperform," emphasized investment analyst Dan Coatsworth from AJ Bell. Meta is feeling the investors' hard stance, even though it continues to deliver better results than analyst estimates. Other heavyweights like Nvidia and Alphabet also lost ground. Nvidia fell by 1.5% and Alphabet dropped by 1.1% after previously gaining from strong results. Amazon and Apple also recorded slight declines in anticipation of upcoming quarterly figures. An increase in the VIX, Wall Street's so-called "fear gauge," indicates that traders are preparing for further rising volatility. Reasons for this include upcoming corporate reports, the forthcoming U.S. presidential elections, and the next central bank meeting in November. Among other market influences, eBay fell by 9% after disappointing sales forecasts, while Robinhood lost 10.3% following missed expectations in the third quarter. Monolithic Power Systems fell by 9.7% after releasing its results, putting the semiconductor sector under overall pressure. Ahead of the market opening, reports from companies such as Uber Technologies, Mastercard, Bristol-Myers Squibb, and ConocoPhillips are expected.