Alphabet, Microsoft earnings in focus; Warsh on AI, rates - what’s moving markets

 Futures linked to the main U.S. stock indices are mixed, as investors parsed through a fresh batch of megacap technology sector earnings and digested the Federal Reserve’s latest interest rate announcement. Elsewhere, Federal Reserve Chair Kevin Warsh casts doubt over whether higher interest rates could impact runaway artificial intelligence spending. 

1. Nasdaq futures drop

Nasdaq futures, in particular, have slumped. By 04:03 ET (08:03 GMT), the Nasdaq futures contract had dropped by 400 points, or 1.3%, S&P 500 futures had declined by 36 points, or 0.5%, and Dow futures had climbed by 150 points, or 0.3%.

The main averages on Wall Street advanced in the prior session, buoyed by renewed belief in the AI trade following weeks of worry around debt-fueled spending and rising borrowing costs. A slew of new financing deals, solid earnings, and cloud-computing giant Oracle’s pledge to limit fundraising through fiscal 2030 helped to support tech stocks.

However, echoing the often rollercoaster nature of AI sentiment, a more cautious tech mood was "the main theme in markets" on Thursday morning, analysts at Deutsche Bank said.

2. Alphabet falls 

Denting optimism around the AI trade were "underwhelming results" from Google-parent Alphabet, the Deutsche Bank analysts flagged.

Shares of the search titan plummeted by more than 10% in premarket U.S. trading after its third-quarter missed expectations, largely because of disappointing revenue from Google’s services unit.

Google’s typically mighty ad revenue also grew at its slowest pace in five quarters, exacerbating fears around the possible returns the company will eventually reap from its massive AI spending plans. In a call with investors, Google management said that while users were embracing its "AI Mode" search option, these queries have been monetized at a slower rate than traditional searches.

At the same time, free cash flow fell deeper into negative territory, reflecting a $6.5 billion increase in capital expenditures versus the prior quarter to $51.4 billion. Like its Big Tech peers, Alphabet has invested heavily in rapidly building out its AI capabilities, dedicating hundreds of billions of dollars to the development of the nascent technology.

3. Samsung’s chip division profit misses estimates

Meanwhile, Samsung Electronics posted operating profit in its key semiconductor division that fell short of analysts’ lofty expectations. In Korean trading, shares of Samsung retreated by more than 4% -- slightly trimming a meteoric rise in the stock so far this year.

Samsung also offered no new details about a possible shareholder return plan, overshadowing a fourth straight quarter of record group-wide income. Overall operating profit came in at 100 trillion won, or around $74.52 billion.

Executives at the company also told investors that next year’s supply of memory chips is already fully booked, thanks to soaring demand for the processors needed to help power cutting-edge AI systems. Samsung, the world’s biggest producer of memory chips, counts Nvidia and other large AI infrastructure names as clients.

Indeed, demand is so strong that Samsung warned that tightness in the memory-chip market will continue for the next few years, likely driving up prices as a result.

4. Microsoft rises amid cloud unit strength

Microsoft, on the other hand, gained in premarket trading. The software behemoth reported that growth at its all-important cloud division accelerated once again, possibly soothing jitters around returns from massive AI investments.

Underpinned by 48% expansion in the Azure cloud unit, Microsoft logged better-than-anticipated overall revenue growth of 19% to $92.28 billion in the first quarter.

Adjusted profit for the quarter stood at $4.89 a share, also above Wall Street expectations. Earlier this week, Microsoft said that it would offer buyouts to a big chunk of its workforce, with The Wall Street Journal reporting that roughly 60,000 employees may be eligible for the program. Microsoft’s headcount was 223,000 workers at the end of June.

The Deutsche Bank analysts said that, despite being generally upbeat, Microsoft’s returns were "insufficient to brighten the overall gloomy tech mood this morning." More tech earnings are due out after the bell, including returns from Amazon and Intel.

5. Warsh flags potential impact of elevated rates on AI

Further adding to this glum feeling was Fed Chair Kevin Warsh, who presented new doubts around the AI trade’s ability to withstand higher interest rates.

AI companies have recently turned to bond and equity markets to fund their ambitions, turning away from a prior strategy of relying on cash flows. In turn, concerns have risen around the impact of a possible uptick in borrowing costs by central banks eager to quell inflationary pressures.

Speaking after the Fed left interest rates unchanged as anticipated on Wednesday, Warsh said that although there was once a narrative that tighter monetary policy was "not going to have any effect on AI because the returns that investors are expecting are so different," he has been "skeptical of that view."

"Interest rates get in the cracks. Interest rates affect, directly or indirectly, almost everything,” Warsh said. Markets widely anticipate that the Fed will hike rates in December, after having lifted borrowing costs for the first time since 2023 in September.

Beyond the Fed, the European Central Bank will announce its own interest rate decision later today.