Nasdaq sits within 1% of correction as tech earnings near

The Nasdaq Composite is one bad trading session from entering correction territory, with a slate of big technology earnings set to determine whether the selloff deepens or stabilizes.

The Nasdaq Composite fell to within 1% of a 10% correction from its May record, as investors questioned the returns on massive AI spending ahead of Big Tech earnings. The Russell 2000 has already crossed that threshold, becoming the first major US benchmark to enter correction.

"Alphabet shares are now in correction territory down 13% from their May all-time highs. Investors questioned the returns on its enormous AI build-out," said MacKenzie Sigalos, a reporter at CNBC.

The selling has been concentrated in mega-cap technology names. Alphabet slid 13% from its May peak after reporting Q2 free cash flow of negative $5.9 billion and long-term debt that nearly doubled to $98.2 billion. The company's Q2 capital expenditure hit $44.9 billion, more than double the prior year, with full-year 2026 guidance of $175 billion to $185 billion. Google Cloud revenue surged 82% to $25 billion in Q2, but rising component costs mean each additional dollar of capex buys less computing capacity, according to Sigalos. The information technology sector led the decline, while defensive sectors such as utilities and consumer staples held up better as investors rotated toward safer positions.

A confirmed Nasdaq correction would mark the first major test of the AI trade that has powered equity gains since early 2023. With 6 in 10 Americans now in the stock market and roughly $51 trillion in equity wealth at risk, according to Federal Reserve data, the upcoming earnings reports from the remaining mega-cap technology companies will determine whether the selloff accelerates or finds a floor.

Google Cloud Surges, But Margins Are the Question

Alphabet's experience illustrates the tension driving the selloff. The company raised roughly $70 billion in combined equity and debt in Q2 alone, established an at-the-market program for up to $40 billion of stock, and suspended its share repurchase program. Interest expense rose nearly fivefold year over year. Bank of America sees Alphabet's capital spending approaching $300 billion by 2027, a trajectory that has forced a structural shift in how the company finances itself.

The Russell 2000's slide into correction territory signals that the weakness extends beyond mega-cap tech. Small-cap stocks, which are more sensitive to domestic economic conditions and borrowing costs, have been hit harder than the broader market, suggesting concerns about the economic outlook are compounding the tech-driven selloff.

The upcoming earnings reports from the remaining mega-cap technology companies represent the next major catalyst. If results fail to justify the AI spending trajectory, the selloff could accelerate. If they surprise to the upside, the market may find a near-term floor. For now, the burden of proof rests on Big Tech to show that the hundreds of billions flowing into AI infrastructure are generating returns that justify the spending.

This article is for informational purposes only and does not constitute investment advice.