European stocks erased their gains as Microsoft's financial results ignited investor concerns over artificial intelligence investments by technology companies. Weaker-than-expected order backlogs in cloud business led to a wipeout of approximately $45 billion in market value for SAP SE.

The Stoxx Europe 600 index closed down 0.2%, having earlier climbed as much as 0.8% during the session. Technology stocks were the worst performers, with SAP's share price plunging 16%, while the energy sector outperformed.

In the United States, Microsoft fell 12% as the company's record-level expenditures and a slowdown in cloud sales growth raised questions about whether its AI investments will take longer than anticipated to yield returns.

Nokia dropped 9.4% after the company's adjusted profit for the fourth quarter declined by approximately 3% year-on-year. Among the gainers, ABB's shares rose 8.5% after the Swiss firm forecast an improvement in profitability this year, fueled by a boom in data centers, and announced a $2 billion share buyback program.

"This is a market where selectivity is crucial," stated Mathieu Racheter, Equity Strategist at Julius Baer, adding that investors should "focus on earnings visibility and balance sheet strength, while diversifying with Europe's sector mix against the backdrop of shifting global capital flows."

The European benchmark stock index has retreated after hitting a record high earlier in January, partly because investors have been severely penalizing companies that report earnings below expectations.

An analysis of 30 companies by industry research shows that stocks which missed expectations for quarterly results or 2026 guidance underperformed the Stoxx 600 by a median of 6.5 percentage points in the subsequent trading session. Conversely, companies that raised their guidance outperformed by 3.8 percentage points.

"Stock valuations are above long-term averages, which means there is less room for error and a narrower margin of safety for stocks that miss earnings," said Dan Boardman-Weston, Chief Investment Officer at BRI Wealth Management. "In the long run, I still believe Europe's prospects for this year are relatively strong."