Inflation, AI concerns take their toll on Wall Street

MANHATTAN (CN) — This week, Wall Street faced challenges as concerns over the artificial intelligence sector contributed to a decline in major stock indexes, particularly in technology. Investors remained cautious amid fears of an AI bubble, especially following disappointing earnings reports from major companies like Amazon.

The downturn was largely attributed to the mixed performance of tech giants. Adam Turnquist, a strategist at LPL Financial, remarked, “Mega-cap stocks have faced increased selling pressure over the past two weeks, as elevated AI-related spending and rising financing costs raise concerns over the path to profitability.”

Friday marked one of the Nasdaq's most challenging trading days in several months, with the index plummeting 2.8% and a total loss of 518 points for the week. The Dow Jones Industrial Average and S&P 500 also ended the week in the red, dropping 445 points and 43 points, respectively.

Earlier in the week, investors were met with mixed economic signals. Notably, the gross domestic product (GDP) unexpectedly rose by 3.4%, while a critical report on personal consumption expenditures indicated a 0.5% inflation increase. Analysts pointed to the rapid growth of artificial intelligence technology and its related infrastructure as contributing factors to both the economic growth and rising inflation.

Adam Slater, an economist with Oxford Economics, noted in an investor report, “Without the AI boom, global growth would be sluggish,” while also highlighting the potential repercussions of this boom, including higher electricity costs and increased borrowing rates. He emphasized that the U.S. economy has become more reliant on this technological surge for growth compared to the dotcom era.

This week, investors also received some relief from the Federal Reserve, which decided to maintain the federal funds rate. However, the announcement did not catalyze a rally on Wall Street, as indicators suggested a more hawkish stance from the central bank. Among the 12 members of the Federal Open Market Committee, two expressed support for a rate hike, and the latest policy statement hinted at potential increases in December and possibly March.

Thomas Ryan, a senior North America economist at Capital Economics, commented, “Looking ahead, we think that the doves on the FOMC will be disappointed, as core inflation pressures remain too strong for comfort next year, fueled by an AI investment boom that we expect will sustain solid activity and keep the labor market tight.”

On a brighter note, the Conference Board reported a 7.5-point rise in its monthly consumer confidence index, which had been on a steady decline since June. The increase was attributed to a slight easing in gasoline prices. Fergus McCormick, a senior economist at the Conference Board, noted, “The recovery was in line with retail gasoline prices easing from September to October.”

Despite this uptick in consumer confidence, McCormick cautioned that the index “remained on the long-term downward trend that’s persisted over the past year,” as consumers indicated they plan to reduce spending over the coming six months.

As Wall Street navigates these mixed signals, the interplay between AI investments, inflationary pressures, and consumer sentiment continues to shape the economic landscape.