Alphabet Reignites AI Spending Concerns as the Yield Curve Steepens
U.S. equity futures are mixed Thursday as dramatically different reactions to Microsoft and Alphabet earnings put AI capital efficiency back at the center of the market. Dow futures are +0.5%, S&P 500 futures -0.3% and Nasdaq-100 futures -1.0% after Wednesday’s S&P 500 +0.28%, Nasdaq +0.27%, Dow +0.19% and Russell 2000 +0.41% advances. Alphabet is down roughly 10% premarket as accelerating AI investment, weaker Search advertising and negative free cash flow overshadowed exceptional Google Cloud growth; Microsoft is up roughly 3.6% after strong Azure growth and cash generation demonstrated greater capacity to self-finance AI spending. The divergence reinforces an increasingly important market distinction: investors are still willing to pay for AI growth, but are becoming much less tolerant of capital spending that does not translate quickly into cash flow.
The Fed left the funds rate unchanged at 3.75%–4.00% Wednesday in a 10–2 decision, with Lisa Cook and Beth Hammack preferring a 25 bp hike. Chair Kevin Warsh’s press conference was interpreted as somewhat less hawkish than the statement, but futures still imply an approximately 80% probability of a December hike. The Treasury reaction was notable: the 2-year yield fell 2 bp to 4.71% while the 10-year rose 4 bp to 5.03% and the 30-year climbed 5 bp to 5.35%, producing a pronounced curve steepening. That combination suggests some reduction in immediate policy-rate pressure but persistent concern around longer-term inflation, growth and term premium. DXY slipped 0.16 to 102.15, EUR/USD strengthened 0.27% to 1.1156 and GBP/USD gained 0.16% to 1.3326. WTI crude rose 1.67% to $101.57, while gold gained 0.24% to $4,084.40.
Today’s 8:30 a.m. ET data cluster is potentially more consequential for rates than Wednesday’s Fed decision. Consensus looks for Q3 real GDP growth of roughly 3.1% annualized versus 2.2% in Q2, September headline PCE inflation of +0.5% m/m and +3.7% y/y, core PCE of +0.3% m/m and +3.1% y/y, personal income +0.3%, consumer spending +0.6% and initial jobless claims near 200,000. The BEA confirms that both the advance Q3 GDP estimate and September Personal Income and Outlays report are due this morning. Strong growth combined with another firm inflation print would reinforce December tightening expectations and keep the 5% 10-year yield threshold central to equity valuation.
Sector Highlights
Wednesday’s Technology +0.48%, Energy +0.41%, Financials +0.36%, Communication Services +0.35% and Industrials +0.28% led the market, while Health Care gained 0.25%, Materials 0.16% and Consumer Discretionary 0.02%. Utilities -0.88%, Real Estate -0.65% and Consumer Staples -0.38% lagged. The sector pattern was consistent with the sharp steepening in Treasury yields: Financials benefited from a wider curve while long-duration bond proxies such as Utilities and Real Estate came under pressure. Energy followed crude higher, while Technology continued to outperform despite the 10-year moving back above 5%.
Breadth was more complicated than the positive indexes suggest. NYSE breadth was negative 1.21:1, while Nasdaq breadth was positive 1.56:1. That divergence indicates significantly stronger participation within growth and Technology exposures than across the broader listed market. It is a healthier setup than a megacap-only rally, but not a broad risk-on signal. With Alphabet now selling off sharply while Microsoft rallies, today provides another test of whether Technology leadership can broaden beyond the largest hyperscalers and remain intact as investors discriminate more aggressively on AI returns.
Information Technology
- MSFT (-0.06%) — Microsoft is up roughly 3.6% premarket after reporting fiscal Q1 revenue of $92.3 billion, up 19%, with Azure revenue growth of approximately 48%. Strong cloud demand and nearly $19 billion of free cash flow eased concerns around the company’s elevated AI investment and reinforced the market’s preference for hyperscalers capable of funding capital expenditures internally.
- NOW (-3.00%) — ServiceNow is down roughly 18% premarket after adjusted earnings missed expectations despite 20.5% revenue growth. AI-related demand remained strong and management raised its 2026 AI annual-contract-value target, but investors focused on slower projected current remaining performance-obligation growth and the earnings shortfall.
- FTNT (-5.90%) — Fortinet is down roughly 25% premarket following its third-quarter results, adding to weakness across software and cybersecurity. The magnitude of the reaction reinforces the increasingly unforgiving earnings environment for high-multiple Technology companies as Treasury yields remain elevated.
- INTC (+1.91%) — Intel is down roughly 3.7% premarket ahead of tonight’s third-quarter earnings report. Expectations center on approximately $16.4 billion of revenue, with investors likely to focus more heavily on AI demand, client spending, foundry execution and forward guidance than the headline EPS number.
Communication Services
- GOOGL (+1.34%) — Alphabet is down roughly 10.2% premarket after Q3 revenue of $127.6 billion fell modestly short of expectations and Search advertising disappointed. Google Cloud revenue surged approximately 103% to $30.7 billion, but negative free cash flow of roughly $9.1 billion and accelerating AI capital spending overwhelmed the cloud strength. The reaction underscores the market’s shift from rewarding AI spending itself to demanding visible returns on that spending.
Consumer Discretionary
- AMZN (+0.59%) — Amazon reports after today’s close, with consensus near $202 billion of revenue and $1.96 of EPS. AWS growth and capital expenditures will be the key variables following the sharply divergent Microsoft and Alphabet reactions, making Amazon the next major test of whether investors believe AI infrastructure spending is generating adequate incremental returns.
- CMG (+2.68%) — Chipotle is up roughly 6.7% premarket after comparable restaurant sales increased 2.1% versus roughly 1.4% expected and revenue rose 9.6% to $3.3 billion. Adjusted EPS of $0.27 missed estimates as labor and input costs pressured margins, but positive traffic trends outweighed the profitability shortfall.
- CVNA (-0.30%) — Carvana is up roughly 7.8% premarket after quarterly revenue climbed 42% to $8.04 billion and retail unit sales increased 39% to a record 217,385 vehicles. Adjusted EBITDA reached a record $800 million, while management expects fourth-quarter volumes to increase sequentially.
Industrials
- CAT (+0.01%) — Caterpillar reported higher third-quarter profit this morning as demand remained strong for power-generation equipment, turbines and construction machinery. Adjusted EPS increased to $7.20 from $4.95 a year earlier, providing another indication that power infrastructure and data-center-related investment remain important supports for industrial demand.
