Thursday's session ended with losses for the major averages, but the broader market held up considerably better than the headline indices suggested. The S&P 500 (-0.3%) and DJIA (-0.3%) finished with relatively modest declines, while the Nasdaq Composite (-1.4%) suffered a more pronounced setback as investors continued to question the enormous spending commitments associated with AI infrastructure development.

The selling was concentrated in mega-cap technology stocks following a series of earnings reports that intensified scrutiny of AI investment returns. Alphabet (GOOG 282.32, -39.57, -12.29%)) was a particularly significant drag after its Q3 results revealed substantial infrastructure spending and negative free cash flow despite exceptional cloud revenue growth. Microsoft (MSFT 530.14, -0.87, -0.16%) also retreated despite strong results and encouraging Azure guidance, as its plans for further capital expenditure increases raised similar concerns.

The communication services sector (-6.6%) bore the brunt of the weakness, while the information technology sector (-0.9%) also finished lower. Software stocks were especially vulnerable following disappointing earnings reactions in ServiceNow (NOW 109.67, -40.46, -26.95%) and Fortinet (FTNT 139.10, -34.98, -20.09%), contributing to a 3.5% decline in the iShares Expanded Tech-Software Sector ETF (IGV).

The PHLX Semiconductor Index (-1.4%) also struggled, with Marvell (MRVL 218.34, -33.31, -13.24%) sliding following reports of potential acquisition discussions with Lumentum (LITE 919.53, +5.58, +0.61%).

The weakness extended to the consumer discretionary sector (-0.6%), where Amazon (AMZN 243.79, -10.81, -4.25%) declined ahead of its earnings report after the close. Still, the sector benefited from some impressive earnings-driven gains in Carvana (CVNA 68.30, +9.24, +15.66%), Norwegian Cruise Line (NCLH 18.22, +2.16, +13.45%), Chipotle Mexican Grill (CMG 31.28, +2.55, +8.88%), and DoorDash (DASH 179.00, +9.51, +5.61%).

Selling pressure intensified during the afternoon, briefly pushing the S&P 500 below its 50-day moving average near 7,698 and bringing the major averages to session lows. The retreat coincided with a recovery in crude oil prices from their morning lows after CBS News reported that Iran's Navy claimed four tankers had struck mines in the Strait of Hormuz. Earlier optimism surrounding a potential resumption of U.S.-Iran peace talks had sent oil prices and Treasury yields lower, providing support for interest-rate-sensitive and consumer-facing stocks. WTI crude ultimately settled $0.73 lower (-0.7%) at $102.01 per barrel.

Despite some fading of the rotational gains during the afternoon, the broader market finished with a decidedly positive tone. Eight S&P 500 sectors advanced, led by the health care (+2.5%) and real estate (+2.3%) sectors. The consumer staples (+1.6%), utilities (+1.6%), financials (+1.5%), and industrials (+1.0%) sectors also recorded solid gains, with positive earnings reactions to Eli Lilly (LLY 1373.00, +84.70, +6.57%), Merck (MRK 146.33, +5.40, +3.83%), and Mastercard (MA 635.70, +25.39, +4.16%) contributing to the strength.

Caterpillar (CAT 647.39, -65.98, -9.25%) was a notable exception, declining sharply as its unchanged outlook and expectations for moderating sales growth overshadowed strong quarterly results.

The divergence was especially apparent in the performance of the S&P 500 Equal Weighted Index (+1.2%), which outperformed the capitalization-weighted S&P 500 by 150 basis points, while the Vanguard Mega Cap Growth ETF (-1.4%) reflected the pressure on the market's largest growth stocks. The Russell 2000 (+1.0%) and S&P Mid Cap 400 (+1.2%) also finished firmly higher. Advancers outpaced decliners by more than 2-to-1 at the NYSE, although breadth was less convincing at the Nasdaq, where advancing issues held only a slim advantage.

The session ultimately reflected a market grappling with increasingly demanding expectations for AI investment returns, even as earnings-driven strength and favorable rotation across other areas provided a meaningful counterweight to the selling in mega-cap technology stocks.

U.S. Treasuries finished a busy Thursday with gains across the curve, rebounding from midweek post-FOMC volatility with the front end leading the way. The 2-year note yield settled down eight basis points to 4.66%, and the 10-year note yield settled down six basis points to 4.99%.

• Russell 2000: +15.2% YTD
• S&P 500: +12.8% YTD
• Nasdaq Composite: +12.7% YTD
• S&P Mid Cap 400: +12.2% YTD
• DJIA: +8.9% YTD

Reviewing today's data:

• Q3 GDP-Adv. 3.4% (Briefing.com consensus 3.0%; Prior 2.2%)
• Q3 Chain Deflator-Adv. 2.2% (Briefing.com consensus 3.5%; Prior 6.1%)
• Personal income increased 0.2% month-over-month (Briefing.com consensus: 0.3%) in September following an upwardly revised 0.3% increase (from 0.2%) in August. Personal spending rose 0.5% month-over-month (Briefing.com consensus: 0.3%) following a 0.9% increase in August. The PCE price Index was up 0.5% month-over-month (Briefing.com consensus: 0.5%), which left it up 3.6% year-over-year versus 3.4% in August. The core PCE price Index jumped 0.3% month-over-month (Briefing.com consensus: 0.3%), leaving it up 3.1% year-over-year versus 3.0% in August.
• Sep PCE Prices 0.5% (Briefing.com consensus 0.5%; Prior 0.3%)
• Sep PCE Prices - Core 0.3% (Briefing.com consensus 0.3%; Prior 0.3% revised from 0.2%)
• Initial jobless claims for the week ending October 24 decreased by 1,000 to 194,000 (Briefing.com consensus: 196,000). Continuing jobless claims for the week ending October 17 decreased by 21,000 to 1.701 million.
  • The key takeaway from the report is that the historically low level of initial jobless claims points to a labor market that remains relatively full on account of a solid demand outlook for goods and services.