Big Tech and software stocks took a beating on Wednesday as investors digested a wave of third-quarter earnings that left many questioning when hefty artificial intelligence investments will actually translate into revenue. ServiceNow plunged 26%, Fortinet tumbled 22%, and Alphabet slid 12%, dragging the broader market down with them.
The selloff underscores how unforgiving this earnings season has become. Even companies that beat their own internal targets are being punished if they fail to clear the market's elevated expectations, especially when it comes to AI monetization.
ServiceNow: Beating guidance, but not the market's bar
ServiceNow, a cloud software company that helps businesses automate workflows, reported results that beat its own guidance. But according to Royal Bank of Canada (RBC), the company didn't clear the higher bar that investors had set. The market is waiting for clearer proof that ServiceNow's AI-powered features can drive meaningful sales growth.
The market's reaction was swift and severe. Trading volume spiked to 48.5 million shares, versus roughly 15 million on a typical day, and the stock slid to $110.37. That kind of volume surge signals intense selling pressure, as institutional investors rushed to reposition.
ServiceNow's situation is a case study in how AI hype has raised the stakes. The company has been pitching AI tools that promise to automate tasks and boost productivity, but investors want to see actual revenue contributions, not just product announcements. Investor skepticism about ServiceNow's AI pitch has been building, and this quarter's results did little to ease those concerns.
Fortinet and Alphabet: Different stories, same theme
Fortinet, a cybersecurity company, saw its shares fall 22% after its quarterly numbers came in softer than expected. The company also faced a downgrade from BofA, which added to the negative sentiment. Fortinet's plunge after its Q3 miss highlights how vulnerable even established tech names are when growth slows.
Alphabet, the parent company of Google, dropped 12% after its earnings report. While the company continues to generate massive profits from its search and advertising businesses, investors are focused on the billions being poured into AI infrastructure. The market is rewarding companies that show discipline in AI spending, and punishing those that don't. Alphabet's plunge reflects a shift toward cash-conscious AI spending.
The broader software sector felt the ripple effects, with many stocks sliding as investors reassessed their exposure to AI-related names. AI fears hit software stocks across the board, and the selloff spread beyond the three companies that reported.
Why this matters for everyday investors
For ordinary investors, this selloff is a reminder that high expectations can be a double-edged sword. When a stock trades at a premium valuation, any disappointment—even a minor one—can trigger a sharp decline. The market is no longer giving companies the benefit of the doubt on AI; it wants to see results.
This doesn't necessarily mean these are bad companies. ServiceNow, Fortinet, and Alphabet are all profitable, well-established businesses. But the market's mood has shifted. Investors are now asking tougher questions: How much are these companies spending on AI, and when will that spending pay off?
For those with diversified portfolios, this kind of volatility is normal. Tech stocks have led the market higher for years, and pullbacks are part of the cycle. The key is to focus on long-term fundamentals rather than short-term price swings.
One thing to watch is whether this selloff spreads to other sectors. If investors become more cautious about AI spending, it could affect everything from chipmakers to cloud providers. Emerging market stocks, meanwhile, are trading at a record discount to US shares, which could offer some diversification opportunities for investors looking beyond the US tech giants.
What's next
Investors will be watching to see if other tech companies follow suit with cautious guidance. The coming weeks will bring more earnings reports, and the market's reaction to those will provide clues about whether this selloff is a one-off or the start of a broader trend.
For now, the message from the market is clear: AI is no longer a free pass. Companies need to show that their investments are generating real returns, and those that can't may face the wrath of investors.
