Microsoft’s 12% Plunge Drags the S&P Lower as Software Stocks Get Hammered

CNBC, USA Today, the Financial Times, Bloomberg, AP, and the Wall Street Journal contributed to this report.

Stocks slid Thursday after a brutal hit to the tech heavyweight Microsoft rattled traders – and that pain rippled through software names and the broader market.

The S&P 500 slipped about 0.6%, the Nasdaq tumbled 1.3%, and the Dow dipped roughly 0.2%. It wasn’t a market crash, but it felt concentrated: Microsoft alone led the sell-off with a 12% drop – its worst single-day plunge since March 2020 – after the company flagged slower cloud growth and gave softer-than-expected operating-margin guidance for the next quarter.

Microsoft’s results weren’t terrible on the surface – revenue and adjusted earnings beat expectations – but investors focused on the slowing momentum in Azure and the company’s ballooning spend on AI infrastructure and data centers. That raised fresh doubts about when Microsoft’s huge AI investments will start meaningfully lift profits, and traders punished the stock hard.

When a megacap like Microsoft stumbles, it magnifies market moves because the stock carries huge index weight. On Thursday it accounted for a big chunk of the S&P’s slide.

The sell-off quickly spread through software stocks. ServiceNow sank roughly 12% despite beating on revenue and profit – a sign that the market’s mood about software is jittery even after good numbers. Salesforce and Oracle fell too, down about 7% and 4% respectively.

The iShares Expanded Tech-Software ETF (ticker IGV) fell into bear-market territory, sliding about 22% off its recent high after Thursday’s losses. That put the fund on track for its largest single-day tumble since last April’s tariff scare.

“AI has become like a two-edged sword,” said Rob Williams, chief investment strategist at Sage Advisory. “It’s a contributor to growth and spending… Now there are more questions about it, so it’s becoming harder for it to continually deliver positive news.”

Translation: investors had already priced in a lot of AI optimism — now they want proof.

Not everything was doom-and-gloom. Meta jumped about 10% after raising its sales outlook and showing that ad strength plus AI monetization can still surprise on the upside. Caterpillar and IBM also saw gains after better-than-expected results.

But risk assets outside equities weren’t spared: Bitcoin slid roughly 6%, dropping to its lowest level in nearly two months, and gold swung wildly – briefly hitting records earlier in the week before trimming gains.

Markets were already digesting the Federal Reserve’s decision to pause rate cuts after three straight cuts in late 2025. The Fed kept the benchmark funds rate steady in the 3.5%–3.75% range and sounded cautious about easing further until inflation clearly softens. That stance made it harder for expensive growth stocks to get a multiple boost from looser policy.

And Washington added another worry: the Senate failed to advance a government-funding package, raising the prospect of a partial federal shutdown this weekend. Political gridlock always adds an extra layer of uncertainty for markets – and traders quickly price that in.

What investors should watch next

• Apple’s earnings (coming after the bell) now carry extra weight – Microsoft’s miss ups the pressure on other megacaps to deliver blowout numbers if the market is to shrug off Thursday’s weakness.
• Cloud and AI spend updates from chipmakers and data-center suppliers will be watched for signs that demand is still trending up or starting to taper.
• Macroeconomic signals: inflation data and the Fed’s tone on future cuts will continue to shape where valuations can go.

Bottom line: Thursday’s sell-off was less about a broad market breakdown and more about a very large tech name failing to meet sky-high expectations, which then triggered a group-wide reappraisal in software and other growth stocks. Investors are reminding each other that when markets are this concentrated, you don’t need broad panic for sharp moves – you just need a few big companies to give traders a reason to hit the exit.