Stocks drop sharply as investors hunt for companies that will be hurt by AI

NEW YORK — U.S. stocks fell sharply Thursday as the market punished companies seen as potential losers from artificial-intelligence technology.

The S&P 500 sank 1.6% for its second-worst day since Thanksgiving, though it’s still near its all-time high set late last month. The Dow Jones Industrial Average dropped 669 points, or 1.3%, and the Nasdaq composite fell 2%.

AppLovin lost nearly a fifth of its value and tumbled 19.7%, even though it reported a stronger profit for the latest quarter than analysts expected. Like other software companies, it’s come under pressure from worries that AI may undercut its business while fundamentally changing how people use the internet.

AppLovin CEO Adam Foroughi pushed back on the concerns, saying in a conference call with analysts that indicators show his company is doing well. “There’s a real disconnect between market sentiment and the reality of our business,” he said.

Its stock nevertheless widened its loss for the young year so far, which came into the day at 32.2%.

Cisco Systems dropped 12.3% despite likewise topping analysts’ expectations for profit and revenue last quarter. The tech giant indicated that it may make less profit off each $1 of revenue during the current quarter than it did in the past quarter.

Analysts said that could be an indicator of higher prices for computer memory that everyone is having to pay amid the rush driven by AI.

More broadly, questions are rising about whether businesses that are spending heavily on AI will end up seeing high-enough profits and productivity to make the investments worth it.

The AI worries have hit software stocks particularly hard, but they’re spreading to other industries and other markets. For bonds, for example, “AI disruption risk” looks set to knock down prices, even if the threat still looks hazy, according to strategists at UBS.

“The timing of AI disruption remains indeterminate, and the fog of uncertainty is unlikely to dissipate quickly,” the strategists led by Matthew Mish wrote in a report.

They expect the AI risk to lead to an increase in defaults in the junk-bond and other low-rated markets. That could hurt even strong, financially stable companies by making it more expensive for them to borrow, including the Big Tech businesses that have been borrowing heavily to pay for their AI investments. That spending has been a major reason the AI frenzy has gotten as big as it has.

In a less likely but very damaging scenario, such knock-on effects “could be significant, potentially undercutting capital spending, investment plans, and ultimately the AI boom itself,” according to the UBS strategists.

In the meantime, some of the companies serving customers with huge AI budgets are benefiting.

Equinix, for example, jumped 10.4% even though the digital infrastructure company’s results for the latest quarter fell…