Meta's AI Spending Spooks Markets; Nasdaq Drops 2.6%

Original authors: Li Dan, Bao Yilong

Source: Wall Street Journal

Meta announced further expansion of its AI capital expenditures, becoming the final straw that broke the U.S. tech stock sector.

On Thursday, October 22, the Nasdaq Composite plunged 2.6%, marking its largest single-day drop since June, while the Philadelphia Semiconductor Index slid 6.7%, with the entire AI supply chain under pressure.

Meta's third-quarter revenue and profits both exceeded market expectations, yet it raised its 2026 capital expenditure guidance and disclosed that its future spending commitments have risen to approximately $825 billion, while announcing the issuance of a new class of non-voting shares to raise funds for AI expansion.

The news quickly sparked market concerns over the funding pressure and investment returns of tech giants, causing Meta's stock to close down about 7%, wiping out approximately $124 billion in market value in a single day.

Meanwhile, escalating tensions in the Middle East pushed oil prices sharply higher, prompting a surge of safe-haven funds into U.S. Treasuries. The 10-year U.S. Treasury yield plunged more than 19 basis points in a single day, falling below the 5% threshold for the first time in nearly a month and recording its largest single-day decline since March 2023.

The Philadelphia Semiconductor Index and the semiconductor industry ETF SOXX, which rebounded about 2% on Wednesday, fell nearly 7% on Thursday. Memory chips, optical communications, and AI cloud computing sectors all experienced significant declines.

Before the Thursday sell-off, retail investors had significantly increased their positions in semiconductor and AI-related stocks over the past week; the concentrated buying pressure created crowded trades that intensified the downward pressure on popular sectors when risk appetite reversed.

Joseph Saluzzi, partner and co-head of equity trading at Themis Trading, said, “It feels like a risk-off day, and tech stocks are always the first to get hit.” He also noted that the rise in bonds confirms that the market is adopting a risk-off strategy. Investors are concerned that “after the midterm elections, the conflict with Iran could escalate and last longer than expected.”

Attacks on Saudi Arabia have intensified market concerns about an escalation of conflict in the Middle East, pushing Brent crude above $110 per barrel during trading. Rising oil prices have reignited inflation worries, and with the U.S. midterm elections less than two weeks away, higher energy prices may further heighten market concerns about inflation and policy prospects.

Under this backdrop, capital began reducing exposure to risk assets and shifted toward relatively safer government bonds. Tech stocks, which have higher valuations and greater reliance on future growth expectations, came under pressure first. The simultaneous rise in U.S. Treasury prices and decline in U.S. equities on Thursday further highlighted the risk-off sentiment of the day. Therefore, although the semiconductor index experienced a sharp decline within the AI supply chain, it cannot be simply interpreted as a broad market bearish outlook on AI.

Rising oil prices not only increase cost pressures on the global economy but may also elevate inflation expectations, raising concerns that central banks such as the Federal Reserve may have limited room to cut interest rates. Meanwhile, AI infrastructure development itself requires substantial capital, electricity, and equipment; rising energy costs and financing pressures could further impact return-on-investment calculations.

For AI-themed stocks, this creates dual pressure: on one hand, the market demands that companies prove their substantial investments can deliver returns; on the other hand, rising oil prices and potential interest rate pressures may increase future investment costs and compress valuation space.

The broad decline in chip stocks on Thursday indicates that AI trading has entered a phase that prioritizes profit realization, capital efficiency, and financing sustainability. Strong demand remains a key support for the industry, but demand growth alone is no longer sufficient to sustain valuation premiums for all companies across the supply chain. Over the coming weeks, earnings reports from major tech companies, their capital expenditure plans, and outlooks from chip equipment manufacturers on supply chains and orders will be critical in determining whether AI trading can stabilize.

The semiconductor sector declined sharply on Thursday, with chip design, manufacturing, equipment, and memory stocks under pressure across the board. By close, Broadcom (AVGO) fell 4.3%, Marvell Technology (MRVL) dropped 8.7%, Intel (INTC) slid 8%, and TSMC (TSM) declined 4.5%.

Semiconductor equipment stocks saw even more pronounced declines. Lam Research and KLA dropped at least 10%, while Applied Materials (AMAT) closed down 8.2%. Among memory chip stocks, SanDisk (SNDK) fell 8.5%, SK Hynix (SKHY) dropped 8.1%, Seagate Technology (STX) declined 7.9%, Western Digital (WDC) fell 6.4%, and Micron Technology (MU) closed down 6.3%.

Stocks related to optical communications and AI infrastructure also faced selling pressure. By close, Coherent (COHR) fell 12.5%, Lumentum (LITE) dropped 11.5%, Credo (CRDO) declined 10.7%, and Corning (GLW) fell 8.1%. AI cloud service providers CoreWeave (CRWV) closed down about 10%, and Nebius (NBIS) fell 7.2%. By close, Dell (DELL) dropped approximately 6.8%, Super Micro Computer (SMCI) fell 5.2%, and Oracle (ORCL) declined about 2.8%.

The broad-based decline across the supply chain indicates that market concerns have expanded from the valuations of individual chip companies to the entire AI infrastructure investment chain. Growth expectations for chip designers, equipment suppliers, memory manufacturers, optical communication companies, and cloud service providers are all closely tied to the ability of large tech firms to sustain their investment in AI infrastructure. Once investors begin to question the speed of returns on these expenditures, related assets may be simultaneously impacted.

Meta became another focal point of AI-related trading pressure on Thursday. The company reported third-quarter revenue of $64.6 billion, a 26% year-over-year increase, surpassing market expectations; earnings per share (EPS) came in at $3.83, also above analysts’ forecast of $3.57. However, the strong current performance failed to alleviate market concerns over future investment costs, with Meta’s stock falling more than 8% at midday and closing down approximately 7%.

Meta has announced a 2026 capital expenditure guidance range of $135 billion to $145 billion, raising the lower end of its previous guidance from $130 billion by $5 billion. The company disclosed that its future commitments, including leases, computing power transactions, and energy agreements, have increased to $825 billion.

Market focus is shifting from whether AI businesses can grow to how much capital is needed and when sufficient returns can be generated. Meta CEO Zuckerberg stated that the company’s investments are yielding results, with core business remaining strong and products like the AI assistant Muse showing growth potential. However, the company also acknowledged that the return cycles for some new AI investments will be longer than those of the core business.

Meta’s credit risk indicators also deteriorated. According to Bloomberg data, Meta’s five-year CDS price rose by approximately 8.9 basis points during the session to around 119.3 basis points, hitting a record high. The rise in CDS prices indicates higher hedging costs for investors against default risk on related debt, reflecting increased market caution regarding Meta’s expanding AI investments and potential financing needs.

Meta also announced a distribution of a new class of non-voting shares to existing shareholders, which may be used in the future for fundraising, employee compensation, and potential acquisitions. This arrangement has further intensified market focus on how the company plans to finance its AI expansion.

Next, Alphabet, Microsoft, and Amazon will陆续 release their quarterly earnings. These major tech companies’ financial reports will not only test whether demand for AI remains sustained, but also reveal whether capital expenditures continue to accelerate and whether enterprises can progressively demonstrate that their investments are translating into revenue, profits, and cash flow. For the market, the key AI trade is no longer just about how fast demand is growing, but whether the scale of spending is sustainable.

Lam Research became one of the leading decliners in the semiconductor equipment sector. After announcing its quarterly earnings, the stock dropped over 10% in early trading and closed nearly 12% lower. The company’s outlook for upcoming performance and concerns over supply constraints have made investors more cautious about industry growth expectations.

According to reports, after the earnings announcement, Lam Research's management stated that, without recent supply constraints, the company's guidance would have been higher. Supply constraints mean that, even with strong demand for AI-related chips, equipment manufacturers may not be able to deliver products or recognize revenue at the expected pace. This has led the market to reassess whether strong orders can be promptly converted into actual performance.

The valuation of semiconductor equipment companies is highly dependent on wafer fab expansion and investment in advanced processes. Previously, the construction of AI data centers drove growth in chip demand, prompting wafer fabs to increase capacity and supporting order growth and stock price appreciation for equipment companies. However, delays in equipment delivery or adjustments to customers’ expansion plans could impact the timing of revenue realization over the next several quarters.

Peer stocks such as Applied Materials and KLA also declined sharply, indicating that investors are not limiting their concerns to Lam Research alone. The equipment sector had previously benefited from AI capital expenditure expectations, making its stock prices highly sensitive to future growth prospects; when the market begins to worry about supply bottlenecks, the pace of capital spending, and valuation levels, related stocks are prone to amplified corrections.

However, supply constraints do not equate to weakened demand for AI chips. More importantly, it is crucial to observe whether device manufacturers can alleviate delivery bottlenecks and whether large tech companies’ data center investments can continue to support foundry capacity expansion. Future earnings reports and management guidance will help the market determine whether this correction is merely a valuation and position adjustment, or whether growth expectations for the AI supply chain are beginning to shift.

The CoreWeave bonds, which had been at the center of investor concerns last week, remained relatively stable on Thursday.

Data shows that the company's bonds maturing in 2032 are trading at slightly below 80 cents (par value of 100 cents), down from about 90 cents last month, but little changed from Wednesday.

CoreWeave is a relatively new AI cloud computing company whose position is particularly vulnerable in the current environment of rising financing pressures. Unlike hyperscale cloud providers such as Google and Amazon, CoreWeave lacks stable cash flow from established businesses and must rely more heavily on external debt to finance infrastructure expansion.

The recent pressure on CoreWeave's bonds reflects broader financing challenges across the AI infrastructure sector.

As tech giants like Meta disclose tens of billions of dollars in future spending commitments, and generative AI companies such as Anthropic and OpenAI continue to raise large sums in capital markets, investors are growing increasingly concerned that available funding pools will be rapidly depleted.

On Thursday, CoreWeave's stock fell by approximately 10%, mirroring broader pressure across the AI cloud computing sector, indicating that the brief stabilization in the bond market does not mean concerns over financing logic in this sector have dissipated.

The risk-off trading on Thursday was not limited to the stock market. As AI-related stocks plunged, French bond markets came under pressure, and tensions in the Middle East escalated again, U.S. Treasuries rallied across the board, posting their best performance in over a year. Yields on some maturities fell by as much as 20 basis points, and the 10-year U.S. Treasury yield dropped below the key 5.0% level for the first time in nearly a month. Buying pressure in U.S. Treasury futures further propelled the market higher.

More notably, market expectations for Fed rate hikes have also been pushed back. Bloomberg reports that traders now fully price in a 25-basis-point hike for January next year, rather than December. Previously, rising energy prices were typically seen as driving inflationary pressures and higher bond yields; however, on Thursday, investors began viewing high oil prices more as a risk to economic growth and hedged by buying U.S. Treasuries.

David Robin, Interest Rate Strategist at TJM Institutional Services, said: "The situation is changing. Risk-off is one thing; growth risk is entirely another." This distinction highlights the deeper meaning behind that day’s bond market movement: investors are not only seeking safe-haven assets due to rising risks, but are also beginning to worry that the sustainability of AI investments and the impact of energy price shocks could affect the broader economic outlook.