Nasdaq Futures Fall About 1% as Alphabet Drops 10% Premarket and Software Stocks Get Hit

Nasdaq futures are pointing lower this morning, Oct. 29, after Alphabet's earnings revived the question the AI trade has been dodging for weeks: when does the spending pay off?

U.S. regular trading has not opened. These are premarket indications, not session prices. At 5:18 a.m. ET, Nasdaq 100 E-minis were down 303 points, or 1.01%. S&P 500 E-minis were off 0.26%. Dow E-minis were up 0.51%. Earlier, at 4:09 a.m. ET, the Nasdaq 100 contract was down as much as 1.22%.

The drop would end a three-day rally in the Nasdaq 100.

Alphabet takes the biggest hit

Alphabet shares were down between 10.2% and 10.5% in premarket trading. If the losses hold, the Google parent would lose more than $400 billion in market value.

The company reported weaker results in its core search advertising business and a surge in cash burn as AI spending accelerated.

"Investors are starting to scrutinize monetization timelines versus the capital expenditure burn rates," said Jeremy Saltzberg, vice president and senior investment officer at Check Capital Management. "Some investors are no longer giving all hyperscalers a 'free pass' to spend without limit."

Microsoft moves the other way

Microsoft is not getting the same treatment. Its shares were up about 3.5% to 3.6% premarket after the company posted a big cash-flow beat and forecast strong cloud growth.

That is the strongest argument against a blanket AI selloff: one hyperscaler showing returns on its spending while another shows mostly the bill. Gabelli Funds portfolio manager Hendi Susanto made a version of that case earlier this month. "The biggest challenge in AI investing right now isn't the fundamentals," he told The Epoch Times on Oct. 15. "It is the expectations that are fragile."

Susanto said the infrastructure buildout should continue into the new year because demand remains high for accelerators, chipmaking equipment, memory chips and networking.

Software and chips slide

The damage reached well beyond Alphabet in premarket trading:

• Fortinet tumbled about 25% after third-quarter results.
• ServiceNow fell 18% to 19% after missing third-quarter profit estimates.
• Zscaler and Salesforce were among the laggards in sector-wide software weakness.
• Marvell Technology fell between 9.4% and 9.7% after media reports said it was in advanced talks to buy data-center optics maker Lumentum Holdings. Lumentum rose between 4.2% and 4.3%. Neither company had responded to requests for comment.
• Micron dropped 3.3%, tracking Samsung Electronics after the South Korean company reported earnings.
• Nvidia was down 0.7% to 1%, AMD 2.8% to 3.3%, and Intel about 3.6% to 3.7%.

A month of AI jitters

The move fits a pattern from October. On Oct. 15, the PHLX Semiconductor Index fell about 2% and was down almost 10% on the week, though still up 61% for the year. South Korea's KOSPI plunged almost 8% that day.

On Oct. 22, Nasdaq futures dropped nearly 2% in premarket trading after Tesla cut its annual capital expenditure forecast and Meta introduced non-voting shares to help fund its AI expansion. Brent crude was near $112 a barrel that morning.

The unveiling of Anthropic's U.S. IPO filing on Monday gave tech a short-lived reprieve before spending worries returned.

Borrowing costs and the Fed

Reuters reported that enthusiasm for the AI trade has been tempered this month by concern that debt-fueled spending is harder to justify as borrowing costs climb. The 10-year Treasury yield was around 5.06% on Oct. 22 and slid below 5.1% on Oct. 15, still historically elevated.

The Federal Reserve held rates steady on Wednesday, as expected, and put off any change in borrowing costs until after next week's midterm elections while it waits for more inflation data.

Jon Butcher, senior U.S. economist at Aberdeen, read the pause as temporary. "The decision to hold seems to be a short pause to assess ahead of a likely policy hike in December, rather than an indication that no further tightening is needed," he said.

That is one analyst's forecast, not a Fed commitment. Fed Chair Kevin Warsh has said he is not interested in giving forward guidance, though bond traders are reading his remarks for it anyway.

What comes next

The September Personal Consumption Expenditures report, the Fed's preferred inflation gauge, is due later today, along with a third-quarter GDP reading. Intel and Amazon report after the close.

Before the open, drugmakers Merck and Eli Lilly, Caterpillar, and alternative asset managers Ares Management and Blue Owl are scheduled to report. Whether Alphabet's premarket loss holds once regular trading begins is still open.