Markets Brief: Alphabet Stock’s Worst Day in History, Signs of Strain Across the AI Trade

Tech stocks sold off sharply last week after earnings reports from hyperscalers Alphabet and Amazon raised an unsettling question: What if Big Tech’s cash cows—the advertising, software, and retail businesses funding much of the data center boom—run dry?

Disappointing results in those core businesses inflamed Wall Street’s concerns about artificial intelligence spending, causing the hyperscalers’ once-robust free cash flows to turn negative this year. Plus, retail investors aren’t showing up like they used to, according to Goldman Sachs, and AI jitters continued to weigh on Chinese tech stocks.

In This Week’s Markets Brief

• Alphabet earnings revive fears about AI monetization and free cash flow.
• China’s AI stock selloff extends to the country’s internet giants.
• What’s happening with individual investors’ demand for stocks?

Google Search Revenue Disappoints as AI Spending Ramps Up

Alphabet GOOG/GOOGL stock had its worst day ever Thursday, falling more than 12% after the company’s disappointing third-quarter earnings report raised questions about AI’s impact on its core Search business and finances. The rout erased about $500 billion from Alphabet’s market capitalization.

Google’s advertising revenue growth slowed in the third quarter despite search volume growing at its fastest rate in more than five years, according to management. Alarmingly for investors, AI was one reason for the slowdown. “It’s worth noting that the strong growth in AI Mode queries had an impact because of the lower monetization we’re seeing in AI Mode,” chief business officer Philipp Schindler told analysts on an earnings call Wednesday.

In the early days of the AI boom, Alphabet was dogged by concerns that tools like OpenAI’s ChatGPT would chip away at Google’s search dominance. The resilience of that business seemed to put those fears to bed, until last week.

Google’s revenue slowdown was especially unnerving because the ad business has been Alphabet’s longstanding cash cow, paying for its aggressive AI infrastructure investments. Alphabet burned through more than $9 billion in cash last quarter as capital expenditures more than doubled to $51.4 billion. Before this year, Alphabet had never in its history as a public company reported negative quarterly free cash flow. It has now posted two consecutive quarters of negative cash flow. According to Jefferies analysts, that figure will likely stay negative through 2028.

Amazon AMZN suffered a similar fate, with shares dropping Friday as disappointing results in its core retail business and negative cash flows overshadowed strong cloud growth. “Investors are now realizing the limits of the capex cycle, and there’s far greater focus on the negative free cash flow and the future potential for return on investment,” says Michael Arone, chief investment strategist at State Street Investment Management.

Chinese AI Stocks Sold Off in October. But Are They a Buy?

AI spending is also in the spotlight in China, where concerns about stretched valuations and return on investments have pressured tech stocks in recent months.

The STAR 50 Index, comprising the 50 largest companies listed on one of China’s premier tech stock exchanges, slumped 24% in October and finished the month nearly 50% below its all-time high at the end of June. The selling pressure extended beyond the semiconductor stocks that surged to record highs earlier in the year, with shares of tech giants Tencent Holdings declining 12% and Alibaba declining 9% in October.

The recent slump was “driven by a sharp reality check on extreme valuations, mounting skepticism over near-term commercial profitability and geopolitical concerns,” says Chelsey Tam, senior equity analyst covering Asia AI, internet, and logistics at Morningstar.

Chinese suppliers have rapidly increased their share of the domestic AI chip market, growing from less than 50% in 2025 to more than 75% this year, according to a recent Morningstar research report. Chinese chipmakers like Huawei also narrowed the performance gap with US rivals like Nvidia and Advanced Micro Devices, helping to lift sentiment and buoy shares earlier this year.

But investors in recent months may have turned their attention to a future in which chip supply catches up to—and potentially exceeds—demand. Morningstar’s analysts see potential for China’s AI chip industry to flip from a shortage to a glut after 2028. Memory chip makers, investing aggressively to meet booming demand, face a similar risk.

Despite the recent selloff, Tam says semiconductor stocks still look expensive, unlike leading Chinese internet companies like Tencent and Alibaba, both of which have wide economic moats and trade about 50% below Morningstar’s fair value estimates. Their shares have been pressured this year by concerns about their ability to recoup AI investments, but Morningstar analysts already see evidence of payoff in advertising revenue growth and other performance metrics. They also expect margins to stabilize in the coming years as capex spending slows and AI-related revenue increases.

Why Individual Investors Matter for the Stock Market

As the AI trade shows signs of strain, Goldman Sachs analysts find that while hedge funds pull back on risk, retail investors aren’t showing up to buy the dip like they used to. The analysts, led by Ben Snider, found that retail trading volumes in the US stock market have declined by 20% since the summer and 45% since late 2025.

The Goldman team attributes that drop to weakening consumer sentiment and rising energy prices, while higher interest rates mean cash and bonds may look more attractive to investors. The analysts also find that the slowing momentum in retail trading has accompanied a small concurrent rise in activity in alternative investment vehicles like leveraged ETFs, options, and prediction markets like Polymarket and Kalshi.

But even as retail traders hit the brakes, household demand has remained robust, and the analysts say that demand will be essential for the stock market. They expect the net supply of US equities to increase in 2027 by the largest margin since 2000, and households will need to keep investing to pick up the slack.

“Household demand will be crucial to balance this supply,” the analysts write. It will also “remain a key determinant of valuations in 2027.” Households currently own 42% of the US equity market via direct ownership of stocks. Counting ownership in retirement accounts, mutual funds, and ETFs, households own the majority of the stock market.

In the year ahead, the Goldman team expects a stable jobs market and falling yields to help support continued household demand for stocks, along with growing equity allocations in retirement plans. Higher interest rates and AI disruption, on the other hand, are key risks to the outlook.