Wall Street went through a rough trading session on Thursday where almost nobody wanted to take big risks. Investors rushed out of fast-moving tech and communications shares and parked their cash in safer spots like defensive stocks and US government bonds.
The hot artificial intelligence trade took a heavy blow, with semiconductor stocks having their worst day since June 23. Meta Platforms led the drop among the giant cloud builders after the company signaled slightly higher future spending and revealed a plan to launch a new class of non-voting stock to raise money for its AI goals.
At the exact same time, crude oil prices jumped after new drone and missile strikes by Iran-aligned Houthi forces on Saudi Arabian oil facilities and airports revived fears of real supply disruptions.
By the closing bell, the S&P 500 fell 1.2% to finish at 7,664.99 points, while the Dow Jones Industrial Average ended the day basically flat at 52,866.85 points. The tech-heavy Nasdaq Composite took the hardest beating, sliding 2.6% down to 26,008.86 points. That made it the index's worst single-day drop since June 5.
Meta Burns Cash to Fund Big AI Dreams
Thursday's biggest talking point on the trading floor was how much money tech giants are borrowing to build massive AI computer centers. Meta Platforms reported negative free cash flow for the quarter—reportedly the first time that has happened since Mark Zuckerberg took the company public back in 2012. The cash drain happened because Meta poured roughly $35 billion into capital investments in just three months.
Meta's stock tumbled 7% by the end of the trading day.
A regulatory filing revealed that Meta holds lease deals for operations and ficing worth roughly $355.7 billion that are not on its official balance sheet yet. These agreements include data center leases that begin later this year and run through 2036.
The same filing showed another $454.5 billion in contracts that Meta cannot walk away from, covering both short-term and multi-year setups. These include energy supply contracts for server facilities and third-party cloud computing arrangements. On top of that, Meta is on the hook to purchase up to $14.7 billion in cloud capacity over the coming five years.
When you add all of those numbers together, Meta has committed to spending an astonishing $824.9 billion down the road on its leases and contracts.
In its quarterly report, Meta told investors it expects revenue between $73 billion and $76 billion for the current quarter, with the high end coming in ahead of Wall Street predictions. The company also narrowed its yearly capital spending estimate to between $135 billion and $145 billion, raising the lower end from $130 billion. Executives, however, barely gave any clues about what they plan to spend past 2026.
The entire earnings release was overshadowed by Meta's plan to issue a new Class C non-voting stock. Existing shareholders worry this could water down the value of their shares down the line, even though it gives Meta a direct way to pull in fresh cash to fund its AI hardware.
"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," O'Rourke explained.
Other big tech cloud players felt the pain right away. Shares of Microsoft, Oracle, Alphabet, and Amazon all dropped between 2.2% and 4.6%.
Heading into Meta's earnings report, traders had already been feeling uneasy about the AI boom for days. The mix of high borrowing costs and eye-popping debt needed to build hardware made traders nervous, leading to wild swings in tech stocks.
"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, said. "Today we are dealing with the former after Meta reported."
Earnings Highlights: Tesla and Others Make Moves
Outside of Meta, Tesla shares slipped 3.1%. The electric car maker, led by Elon Musk, reduced its annual car delivery target down to 5 million units by 2030, while investors talked about the possibility of a big partnership with Musk's rocket firm, SpaceX.
Earlier, Musk had set a target of 20 million cars per year. In recent years, though, he backed away from that number to put Tesla's main focus on robotics and artificial intelligence. Musk stated that the company wants to start delivering its Optimus humanoid robots to business clients by late 2027 and expects self-driving robotaxis to turn into a huge revenue engine.
Tesla did manage to keep its free cash flow positive in the third quarter, even with all the heavy spending on automation. The company now expects to spend roughly $20 billion on capital projects this year, down from an earlier estimate of $25 billion.
Elsewhere in earnings, Procter & Gamble climbed 5.6%, helping keep the Dow Jones from falling into the red. The company behind Tide, Gillette, and Pampers posted an organic sales rise of 4%, double what analysts expected.
American Airlines posted third-quarter profits that beat estimates, but its guidance for the current quarter looked light. Even so, the stock managed to gain 3%.
Lockheed Martin saw its shares jump 7% on better-than-expected earnings as defense manufacturing sped up across the board.
Spotify Technology added six million paid subscribers during the third quarter, bringing its total to 306 million. That beat company forecasts and market expectations, sending shares of the audio streaming company surging 11.1%.
Brent Crude Climbs on Middle East Tensions
Shifting over to commodities, Brent crude oil prices reached their highest level in more than five months after fresh Houthi strikes hit Saudi infrastructure, raising genuine supply worries.
The Houthis claimed they carried out four military operations over 48 hours targeting Saudi sites. These included the Ministry of Defense building in Riyadh, a Saudi Aramco installation in Yanbu, and two commercial airports.
Reports indicated that Saudi Aramco instructed employees to evacuate its headquarters in Dhahran along the Persian Gulf near Bahrain. Earlier on Wednesday, the US Embassy in Riyadh put out a safety warning telling American citizens about potential drone and missile strikes against airports.
Meanwhile, The New York Times reported that the US and Israel have worked out military plans for possible strikes against Iranian energy sites, nuclear facilities, and missile bases following the US midterm elections in November.
Brent crude gained 4% to reach $113.13 a barrel by late afternoon, while US West Texas Intermediate (WTI) crude jumped 2.3% to trade at $99.40 a barrel.
Conclusion for Businesses and Traders
The clear message from this session is that the market is no longer cheering blindly for AI spending. Investors want to see actual cash returns, not just hundreds of billions in long-term lease commitments and ballooning debt. For businesses building on top of tech and cloud services, expect tech providers to face tighter budgets and more scrutiny on their capital spending. For traders, market sentiment has turned cautious: watch cash flow numbers closely, keep an eye on rising oil prices that could revive inflation, and do not expect every dip in high-multiple tech stocks to get bought up right away.