U.S. stocks fall sharply as investors punish companies seen as losers from AI

Traders work on the floor at the New York Stock Exchange in New York. (AP Photo/Seth Wenig)

U.S. stocks fell sharply as the market punished companies seen as potential losers from artificial-intelligence technology.

The S&P 500 sank 1.6% for its second-worst day since Thanksgiving, though it’s still near its all-time high set late last month. The Dow Jones Industrial Average dropped 1.3% and the Nasdaq composite lost 2%. Cisco Systems was one of the heaviest weights on the market after warning of potentially higher expenses, while AppLovin tumbled as worries about AI competition continue to hit software companies. Treasury yields tumbled in the bond market ahead of Friday’s coming report on inflation at the U.S. consumer level.

THIS IS A BREAKING NEWS UPDATE. AP’s earlier story follows below.

NEW YORK (AP) — U.S. stocks are dropping Thursday as the market punishes companies seen as potential losers from artificial-intelligence technology.

The S&P 500 fell 1.1% after erasing an early gain that brought it near its all-time high. The Dow Jones Industrial Average was down 472 points, or 0.9%, as of 2:20 p.m. Eastern time, and the Nasdaq composite was 1.7% lower.

AppLovin tumbled 18.3% despite reporting a stronger profit for the latest quarter than analysts expected. Like other software companies, it’s come under pressure recently from worries that AI may undercut its business while fundamentally changing how people use the internet.

AppLovin CEO Adam Foroughi pushed back on the concerns, saying in a conference call with analysts that indicators show his company is doing well. “There’s a real disconnect between market sentiment and the reality of our business,” he said.

Its stock nevertheless increased its loss for the young year so far, which came into the day at 32.2%.

Cisco Systems dropped 11.6% despite likewise topping analysts’ expectations for profit and revenue last quarter. The tech giant indicated that it may make less profit off each $1 of revenue during the current quarter than it did in the past quarter.

Analysts said that could be an indicator of higher prices for computer memory that everyone is having to pay amid the rush driven by AI.

More broadly, questions are rising about whether businesses that are spending heavily on AI will end up seeing high-enough profits and productivity to make the investments worth it.

The AI worries have hit software stocks particularly hard, but they’re spreading to other industries and other markets. For bonds, for example, “AI disruption risk” looks set to knock down prices through this year and into next, even if the threat still looks hazy, according to strategists at UBS.

“The timing of AI disruption remains indeterminate, and the fog of uncertainty is unlikely to dissipate quickly,” the strategists led by Matthew Mish wrote in a report.

They nevertheless expect the AI risk to lead to an increase in defaults in the junk-bond and other low-rated markets. That could hurt even strong, financially stable companies by making it more expensive for them to borrow, including the Big Tech businesses that have been borrowing heavily to pay for their AI investments. That spending has been a major reason the AI frenzy has gotten as big as it has.

In a less likely but very damaging scenario, such knock-on effects “could be significant, potentially undercutting capital spending, investment plans, and ultimately the AI boom itself,” according to the UBS strategists.

In the meantime, some of the companies serving customers with huge AI budgets are benefiting.

Equinix, for example, jumped 10.9% even though the digital infrastructure company’s results for the latest quarter fell short of analysts’ expectations. It gave financial forecasts for 2026 that topped analysts’ expectations, and CEO Adaire Fox-Martin said that “demand for our solutions has never been higher.”

The company’s data centers are helping to power the world’s move into AI.

Outside of tech, McDonald’s rose 1.9% after reporting a stronger profit for the latest quarter than analysts expected. The restaurant chain credited moves to improve its value and affordability, including cutting prices on some U.S. combo meals in September.

Walmart’s rally of 3.6%, meanwhile, was one of the strongest forces pushing upward on the S&P 500. It erased losses from earlier in the week after a report said spending at U.S. retailers overall stalled in December.

In the bond market, Treasury yields fell as investors looked for safer places to park their cash. A report also said slightly more U.S. workers filed for unemployment benefits last week than economists expected.

Still, the number was lower than the prior week’s, which is a signal that the pace of layoffs may be improving. It also followed a surprisingly strong report on the job market from Wednesday, which said the nation’s unemployment rate improved last month.

A strengthening job market could push the Federal Reserve to hold interest rates steady and keep its cuts on pause, even if President Donald Trump keeps loudly and aggressively calling for lower rates. That’s because lower rates, while giving the economy a boost, can also worsen inflation.

It all raises the stakes for Friday’s upcoming report on inflation at the U.S. consumer level. Economists expect it to show inflation slowed to 2.5% last month from 2.7% in December.

A separate report on Thursday said that sales of previously occupied homes slumped last month by more than economists expected, which also weighed on yields.

The yield on the 10-year Treasury fell to 4.10% from 4.18% late Wednesday.

In stock markets abroad, South Korea’s Kospi rushed 3.1% higher thanks to gains for Samsung Electronics, SK Hynix and other tech stocks. The moves were more modest in other Asian markets and in Europe.

Hong Kong’s Hang Seng fell 0.9%, and France’s CAC 40 rose 0.3%.

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Stan Choe, The Associated Press. AP Business Writers Chan Ho-him and Matt Ott contributed.