U.S. stock markets declined on Thursday as investors grew increasingly cautious about which companies may lose out in the rapidly evolving artificial intelligence race.

The S&P 500 dropped 1.1%, retreating after briefly trading near record highs. The Dow Jones Industrial Average fell 472 points (0.9%), while the Nasdaq Composite slid 1.7%, led by sharp losses in technology and software stocks.

AI Fears Pressure Software Stocks

Investor anxiety centered on whether artificial intelligence could disrupt existing business models faster than companies can adapt.

AppLovin plunged 18.3%, despite posting quarterly profits that exceeded Wall Street expectations. The advertising software firm has come under pressure amid fears that AI-driven changes in digital behavior could weaken its core business.

Addressing analysts, AppLovin CEO Adam Foroughi pushed back against the pessimism, stating that company metrics remain strong and warning of a disconnect between market sentiment and operational performance. Even so, the stock extended its year-to-date decline, which stood above 32%before Thursday’s sell-off.

Cisco Drops Despite Beating Estimates

Cisco Systems also fell sharply, down 11.6%, after reporting better-than-expected earnings and revenue. Investors reacted negatively to guidance suggesting slimmer profit margins in the current quarter.

Analysts pointed to rising costs—particularly for computer memory and infrastructure—as companies rush to scale AI capabilities, cutting into margins even for established tech giants.

Growing Doubts Around AI Profitability

Beyond individual earnings reports, broader questions are emerging over whether heavy AI investments will ultimately deliver sufficient returns.

According to strategists at UBS, uncertainty around the timing and scale of AI disruption could weigh on multiple markets, including bonds. The firm warned that “AI disruption risk” may increase default rates in junk bonds and other lower-rated credit markets.

Such developments could raise borrowing costs, even for financially strong companies, including major tech firms that have relied heavily on debt to fund AI expansion.

In a worst-case scenario, UBS noted that reduced capital spending and tighter financial conditions could slow investment and potentially weaken the broader AI boom.

AI Infrastructure Firms See Gains

While many software stocks struggled, companies enabling AI infrastructure continued to benefit.

Equinix surged 10.9%, despite missing analysts’ expectations for its latest quarterly results. The data center operator issued a stronger-than-expected outlook for 2026, citing unprecedented demand for its services as AI adoption accelerates globally.

CEO Adaire Fox-Martin said demand for Equinix’s digital infrastructure has “never been higher,” reinforcing optimism around companies powering AI rather than building applications.

Strength Outside the Tech Sector

Outside technology, several consumer-facing companies posted gains.

McDonald’s rose 1.9% after reporting stronger quarterly profits, crediting improved value offerings and price reductions on U.S. combo meals.

Walmart jumped 3.6%, helping limit broader market losses. The retail giant rebounded after data showed U.S. consumer spending stalled in December, easing concerns about demand volatility.

Bonds, Jobs, and Inflation in Focus

In the bond market, Treasury yields declined as investors sought safer assets. The yield on the 10-year Treasury fell to 4.10%, down from 4.18% the previous day.

Economic data showed a slight uptick in jobless claims, though filings remained lower than the prior week—suggesting layoffs may be stabilizing. A strong labor market could keep the Federal Reserve cautious about cutting interest rates, despite public pressure from President Donald Trump.

Attention now turns to Friday’s U.S. inflation report, with economists expecting consumer inflation to ease to 2.5%, down from 2.7% in December.

Global Markets Mixed

Overseas markets showed mixed performance.

South Korea’s Kospi jumped 3.1%, led by gains in Samsung Electronics and SK Hynix
Hong Kong’s Hang Seng fell 0.9%
France’s CAC 40 edged 0.3% higher