Key Highlights

● Alphabet was one of several megacap technology stocks that dragged on the S&P 500.

● Worries focused on how borrowing for data centers could affect cash flow at Big Tech.

● All but seven of the 75 S&P 500 technology stocks closed lower.

● Meta, Tesla, IBM and SAP report Oct 21, testing the AI spending story.

Big Tech under pressure

Alphabet (NASDAQ:GOOGL) fell on Friday, one of several megacap technology stocks that dragged on the S&P 500. Market data showed a solid closing decline for the Google parent, and another report put the shares at $336.91 at midday.

Commentary tied the selling to concerns about how borrowing to build data centers could affect cash flow at the biggest technology companies. Alphabet, like its Big Tech peers, has been spending heavily on AI infrastructure, including data centers and custom chips, to support products such as its Gemini models and Google Cloud.

Meta Platforms (NASDAQ:META) also fell, and Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) slipped, per market reports. Data-center credit pressure was cited as a factor weighing on Meta.

From what AI can do to how it gets paid for

The day's dominant theme was a shift in how investors view the AI boom. Market commentary said the market has moved from asking what AI can do to asking how its build-out will be financed. Debt-funded AI infrastructure names were hit hardest, with CoreWeave (NASDAQ:CRWV) plunging, but the questions extended to the largest technology companies.

One market commentator framed it this way: "The AI group is now splitting between companies that can fund the buildout themselves and those that have to borrow." The commentator added, "That is a change in character, and it's another reason the leaders no longer look like a safe haven."

Market commentary said more than $1 trillion was erased from semiconductor and AI-related stocks over the week.

A broad tech retreat

The selling was widespread. All but seven of the 75 technology stocks in the S&P 500 closed lower, according to market data. The communication services sector, home to Alphabet and Meta, fell, as did the technology sector. All 30 members of the PHLX Semiconductor Index fell, and one report said 41 of 45 software stocks in a basket declined.

The S&P 500 fell 84.62 points to 7,659.44 after opening higher, and the Nasdaq Composite dropped 572.99 points to 26,140.03. The Dow Jones Industrial Average slipped 175.28 points to 52,002.41. Energy, utilities and consumer staples rose as investors rotated into defensive areas. Brent crude climbed $3.94 to $109.86 a barrel.

The VIX volatility index jumped 3.53 points to 19.99, after touching 22.31 intraday, its highest since June 11. For the week, the Nasdaq posted its worst performance since June, and the S&P 500 had its biggest weekly drop since June.

Rates in the background

Bond yields remain a concern for companies spending and borrowing heavily. The 10-year Treasury yield eased to roughly 5.1 on Friday but topped 5.3 earlier in October, its highest since 2002. The Federal Reserve raised rates a quarter point in September, and Chair Kevin Warsh, speaking at an IMF gathering in Bangkok, declined to preview the next move. "I don't prejudge meetings," he said.

Big Tech Earnings Test Alphabet's AI Spend

Big Tech earnings will test the AI spending story. One analyst said "upcoming Big Tech earnings will still need to demonstrate that the enormous investment in AI is translating." The Federal Reserve's next rate decision is due Oct 28, and the PCE inflation report and the first estimate of third-quarter GDP follow on Oct 29. Meta reports on Wednesday, Oct 21, along with Tesla (NASDAQ:TSLA), IBM (NYSE:IBM) and SAP (NYSE:SAP).