US STOCKS-Wall Street indexes see red as Big Tech's soaring AI budgets trigger flight

By Sinéad Carew and Pranav Kashyap

Jan 29 (Reuters) - Wall Street's main indexes fell on Thursday with technology-heavy Nasdaq leading declines as investors were rattled by the latest earnings reports and worried about whether hefty spending on artificial intelligence would pay off for mega‑cap tech companies.

Microsoft MSFT.O slumped 12% after the software giant's cloud revenue failed to impress and stoked fears the hefty outlays behind its OpenAI alliance were not reaping returns fast enough.

It was the biggest drag on the S&P 500 while other software stocks also tumbled with SAP's SAPG.DE cautious cloud outlook sending its U.S. shares down more than 15% and ServiceNow NOW.N shares down more than 11% as its earnings report added to the gloom.

"Microsoft disappointed and there are some genuine concerns that AI investments will eat the software companies' lunches," said John Praveen, managing director & Co-CIO, Paleo Leon in Princeton, New Jersey.

Investors are trying to "reduce exposure to stocks and play it safe" against a backdrop of broader uncertainties including who the Federal Reserve's next Chair will be and how many interest rate cuts it will make, according to Praveen who also cited political uncertainties related to Washington's stance against Iran and Greenland and the potential for a U.S. government shutdown.

"There are all sorts of storm clouds in the background," he said.

At 2:20 p.m. the Dow Jones Industrial Average .DJI fell 52.98 points, or 0.11%, to 48,962.62, the S&P 500 .SPX lost 36.55 points, or 0.52%, to 6,941.48 and the Nasdaq Composite .IXIC lost 297.39 points, or 1.25%, to 23,560.06.

Other software companies under pressure besides Microsoft included Salesforce CRM.N, down 7% and Oracle, down 4%. Adobe ADBE.O lost 3% and cloud security firm Datadog DDOG.O fell 8.8%.

Elsewhere among megacap companies, Tesla TSLA.O shares fell 2.4%, after the electric‑vehicle maker outlined plans to more than double capital expenditures to a record level.

Among the S&P 500's 11 major industry sectors, technology .SPLRCT was the biggest laggard, down 2.8%. Communications services was the biggest gainer, up more than 2% as Facebook parent Meta META.O jumped 10.3%, bucking the trend among megacaps. The social media giant paired an upbeat revenue forecast with a 73% jump in this year's capex budget.

In other positive news, technology bellwether IBM IBM.N shares jumped about 3% after beating estimates in its fourth-quarter earnings.

The energy index .SPNY was the second biggest gainer up 1.9% on the back of surging oil prices, with Brent crude futures hitting a near six-month high on rising concerns about a possible U.S. military attack on Iran. O/R

In other notable earnings, Caterpillar CAT.N and Mastercard MA.N added about 3% and 3.8%, respectively, after posting a higher profit for the quarter.

Defense contractor Lockheed Martin LMT.N rose 6% after forecasting 2026 earnings above Wall Street expectations. Southwest Airlines LUV.N shares advanced 18.6% after the carrier forecast a stronger-than-expected annual profit, making it the S&P 500's biggest percentage gainer so far on Thursday.

Among other stock moves, rare-earth miners slid following a report the Trump Administration would step back from critical mineral price floors.

USA Rare Earth USAR.O fell 11%, MP Materials MP.N was down 8.5%, while Critical Metals CRML.O sank 15.7% and United States Antimony UAMY.A dropped over 14%.

Declining issues outnumbered advancers by a 1.08-to-1 ratio on the NYSE where there were 524 new highs and 161 new lows. On the Nasdaq, 1,765 stocks rose and 2,925 fell as declining issues outnumbered advancers by a 1.66-to-1 ratio.

The S&P 500 posted 50 new 52-week highs and 19 new lows while the Nasdaq Composite recorded 81 new highs and 200 new lows.