Wall St slides as Meta, Microsoft warnings trigger fears over AI trade

Oct 31 (Reuters) - Wall Street tumbled on Thursday, after warnings from Microsoft and Meta Platforms about escalating AI costs curtailed enthusiasm for megacap stocks, which have driven the market rally this year.

Shares of Facebook-owner Meta Platforms (META.O), opens new tab dropped 4%, while Microsoft (MSFT.O), opens new tab fell 5.6%, despite both companies beating earnings estimates in results reported after the bell on Wednesday.

"The market, overall, has been disappointed with mega tech guidance, especially with regard to Meta's AI expenditures as well as slower-than-anticipated integration of AI into Microsoft's cloud platform," said Quincy Krosby, chief global strategist for LPL Financial.

The yield on the benchmark 10-year Treasury note also rose, past 4.3%, further pressuring equities.

Meanwhile, the Personal Consumption Expenditures price index, the Federal Reserve's preferred inflation metric, rose 0.2% in September, in line with economists' expectation. However, the core figure was 2.7% year-over-year, slightly higher than the 2.6% forecast, while consumer spending increased a little more than expected.

After the data, traders stuck to bets for a 25-basis-point rate reduction in the Fed's November meeting.

"Despite some stickiness to core PCE measures, overall PCE continues to trend lower... while December’s (Federal Reserve) rate cut may not be such a certainty, a rate cut in November is firmly on the table," said Bret Kenwell, eToro U.S. Investment Analyst.

Microsoft and Meta both said their capital expenses were growing due to AI investments, which could impact profitability, even as investors look for quick returns on the billions already poured in.

Other so-called Magnificent Seven stocks slipped. Amazon.com (AMZN.O), opens new tab was down 3.4% and Apple (AAPL.O), opens new tab dropped 1.4% ahead of quarterly results from both, due after market close.

Although betting on AI-driven tech stocks propelled Wall Street to record highs this year, investor exuberance has meant stocks are trading at incredibly expensive valuations. Meta and Microsoft's warnings point to the challenges companies face in pleasing investors.