Alphabet's 12.6% Plunge Is Its Worst Day in Over 20 Years

Alphabet's Class A shares fell 12.6% on Thursday, their worst single-day drop since the stock began trading more than 20 years ago. That plunge dragged the S&P 500 down 0.3% for its first loss in four days and underscored a question now hanging over every AI budget on Wall Street: will the money actually pay off?

The company behind Google and YouTube reported weaker summer growth than analysts expected, according to its earnings release late Wednesday. The shortfall hit a nerve because investors had already been pressuring Alphabet to at least meet growth expectations while it pours capital into artificial intelligence.

Where did the cash go?

The numbers explain the alarm. Alphabet said its free cash flow turned negative — the company burned through more cash than it generated — after its purchases of property and equipment topped $51 billion in the latest quarter. That's the physical bill for data centers and AI chips, and it arrived in the same week that borrowing costs sit near multi-decade highs.

The worry isn't Alphabet's alone. Concerns are weighing on the entire AI industry following a frenzy to build data centers and fill them with chips. Investors fear the AI revolution may not produce as much profit and productivity as hoped, and future data-center spending is under pressure because borrowing money to buy more chips has become expensive.

What does this change for the broader market?

Here's the strange part: Thursday was actually a good day for most stocks. Four out of every five stocks in the S&P 500 climbed. The index would have finished higher if not for Alphabet, which carries outsized weight because it's one of the largest companies on Wall Street.

The final tallies: the S&P 500 fell 23.59 points to 7,720.39; the Dow Jones Industrial Average dropped 132.54 points, or 0.3%, to 52,342.56; and the Nasdaq composite tumbled 1.4%, losing 365.13 points to close at 26,184.72.

Earnings season is doing its job elsewhere. Expectations for profit growth across U.S. companies are high, and that's what allowed the S&P 500 to set its record earlier this month despite high interest rates and other headwinds.

Which companies rallied?

A string of stronger-than-expected summer reports pushed shares higher:

• KLA Corp., whose equipment helps make semiconductors, rose 5.5%.
• Eli Lilly climbed 6.6%; Mastercard rose 4.2%; Merck added 3.8%.
• DoorDash gained 5.6% after agreeing to buy Instacart in a deal valuing it at $17 billion. DoorDash also beat analyst forecasts on both profit and revenue for the latest quarter.
• Norwegian Cruise Line Holdings steamed 13.4% higher after topping expectations for summertime profit and revenue, helped by cruisers spending more money aboard ships than the company anticipated.

Bonds, oil and the economy

Treasury yields eased after a jumble of mixed U.S. economic reports. A preliminary report suggested overall economic growth may have accelerated more during the summer than economists expected, thanks to consumer spending and businesses investing in AI. But Americans' income growth was weaker than expected in September, and a measure of inflation worsened. Fewer U.S. workers applied for unemployment benefits last week, which could indicate few layoffs nationwide.

The yield on the 10-year Treasury fell to 4.94% from 5.05% late Wednesday. It has generally pulled back since topping 5.30% earlier this month, a level that touched its highest point since 2002. Oil helped drag yields lower too: Brent crude fell 0.8% to $110.80 a barrel.

Overseas markets

European indexes rose after the European Central Bank held interest rates steady. ECB President Christine Lagarde also said she will resign in February, nine months before the end of her term.

Asian indexes were mixed. South Korea's Kospi fell 1.2% on a drop for heavyweight Samsung Electronics, which sank 4.1% even though it reported a jump in profit — a reminder that in this market, beating expectations isn't always enough when AI sentiment turns.

For portfolio managers, the takeaway is straightforward: one company's capex report can now move the entire U.S. market, and the next AI-spending disclosure — from Alphabet or any mega-cap peer — will likely set the tone again.