The S&P 500 and the technology-heavy Nasdaq closed lower on Thursday 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.

While the indexes recovered some losses by the end of the session, they were still weighed down by a weak technology sector.

Microsoft was the biggest drag on the S&P 500. Its shares slumped 10 percent after the software giant's cloud revenue failed to impress and stoked fears the hefty outlays for its OpenAI alliance were not reaping returns fast enough.

"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 around Washington's stance in relation to Iran and Greenland and the potential for a US government shutdown.

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

The Dow Jones Industrial Average managed to eke out a tiny gain late in the session, rising 0.1 percent to 49,071. The S&P 500 closed well above its session low but still ended the day down 0.1 percent at 6,969. The Nasdaq Composite finished down 0.7 percent at 23,685 after paring losses in the last half hour of trading.

Software companies caught up in the selloff included Salesforce, down 6 percent, Oracle, off 2.2 percent and Adobe, down 2.6 percent.

For some software companies, such as ServiceNow and Salesforce, the fear is that "AI is going to disrupt their business a little bit," if AI can be used "to supplant some of their services," said Jay Hatfield, CEO and CIO of Infrastructure Capital Advisors in New York.

"It doesn't really matter, what the reality is or isn't. Those stocks are getting hit pretty hard," he said.

Following its after-the-bell report, late trading in Apple Inc shares was choppy with a gain of less than 1 percent after it beat quarterly revenue estimates on a sharp rebound in China while CEO Tim Cook told Reuters that demand for its latest iPhone was "staggering."

Among other megacap companies, Tesla shares lost 3.5 percent 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 was the biggest laggard, falling 1.9 percent.

Communications services, up 2.9 percent, ⁠was the biggest gainer however as Facebook parent Meta rallied 10.4 percent. Bucking the trend among megacaps, the social media giant paired an upbeat revenue forecast with a 73 percent jump in this year's capex budget. (Reuters)