The stock market is in a state of flux as investors grapple with the potential impact of artificial intelligence (AI) on various industries. A notable drop in U.S. stocks on Thursday reflects a growing concern among investors about the future of certain companies in the face of AI advancements.
The S&P 500 experienced a 1.1% decline, erasing an initial gain that had brought it close to its all-time high. The Dow Jones Industrial Average also took a hit, dropping 0.9%, while the Nasdaq composite fell 1.7%.
The AI Effect: Winners and Losers
One of the most affected companies is AppLovin, which saw its stock tumble by 18.3% despite reporting better-than-expected profits for the latest quarter. AppLovin, like many software companies, is facing pressure due to concerns that AI could disrupt its business model and change the way people interact with the internet.
AppLovin's CEO, Adam Foroughi, addressed these concerns during a conference call, stating that there is a disconnect between market sentiment and the company's actual performance. He emphasized that indicators show the company is doing well.
However, the market's reaction has been harsh, with AppLovin's stock loss for the year so far increasing to 32.2%.
Cisco Systems, another tech giant, also experienced a significant drop of 11.6%, despite exceeding analysts' expectations for profit and revenue in the last quarter. The company indicated that its profit margin per dollar of revenue might decrease in the current quarter, which analysts attribute to rising computer memory prices due to the AI-driven rush.
But here's where it gets controversial: the AI worries are not limited to software stocks. They are spreading across industries and markets. For instance, in the bond market, strategists at UBS predict that the "AI disruption risk" will continue to impact prices throughout this year and into the next, even though the threat remains somewhat unclear.
The UBS strategists, led by Matthew Mish, wrote in their report: "The timing of AI disruption remains indeterminate, and the fog of uncertainty is unlikely to dissipate quickly." Despite this, they expect the AI risk to lead to an increase in defaults in the junk-bond and low-rated markets, potentially affecting even financially stable companies by increasing their borrowing costs.
In a worst-case scenario, these knock-on effects could significantly undermine capital spending, investment plans, and ultimately, the AI boom itself.
However, not all companies are suffering. Some, like Equinix, are benefiting from serving customers with large AI budgets. Equinix's stock jumped 10.9%, even though its latest quarterly results fell short of analysts' expectations. The company's CEO, Adaire Fox-Martin, highlighted the high demand for their solutions, which are powering the world's transition into AI.
Outside the tech sector, McDonald's reported better-than-expected profits for the latest quarter, rising 1.9%. The restaurant chain attributed this to its efforts to improve value and affordability, including price cuts on certain combo meals in the U.S.
Walmart's strong performance, with a 3.6% rally, was one of the key drivers pushing the S&P 500 upward. This rally erased earlier weekly losses after a report indicated that spending at U.S. retailers stalled in December.
In the bond market, investors sought safer havens, causing Treasury yields to fall. A report also showed a slight increase in U.S. workers filing for unemployment benefits last week, more than economists had anticipated.
Despite this, the number was lower than the previous week's, suggesting that the pace of layoffs may be improving. This follows a surprisingly strong job market report on Wednesday, indicating an improvement in the nation's unemployment rate last month.
A strengthening job market could influence the Federal Reserve's decision to hold interest rates steady and pause its cuts, even with President Donald Trump's persistent calls for lower rates. Lower rates can boost the economy but also worsen inflation.
All eyes are now on Friday's inflation report at the U.S. consumer level, which is expected to show a slowdown to 2.5% last month from 2.7% in December. A separate report on Thursday indicated that sales of previously occupied homes slumped last month, further impacting yields.
The yield on the 10-year Treasury fell to 4.10% from 4.18% late Wednesday.
In international stock markets, South Korea's Kospi saw a 3.1% surge, driven by gains in Samsung Electronics, SK Hynix, and other tech stocks. The moves were more modest in other Asian markets and Europe, with Hong Kong's Hang Seng falling 0.9% and France's CAC 40 rising 0.3%.
This story was written by Stan Choe, with contributions from AP Business Writers Chan Ho-him and Matt Ott.
