Why Microsoft Stock Tumbled Today
Key Points
A clutch of state attorneys general sent a letter warning selected tech companies about the dangers of their AI chatbots.
Several top industry names received the letter.
A finger-wagging from state attorneys general over artificial intelligence (AI) chatbots was the catalyst behind a mild sell-off of Microsoft (NASDAQ: MSFT) stock on Wednesday. While this isn't the first, or the most serious, regulatory issue the company has faced, it wasn't helping sentiment on the tech giant. It contributed to Microsoft's nearly 3% decline in share price that day.
Concerns expressed
That morning, a bipartisan group of state attorneys general sent a letter to several major tech companies -- including Microsoft, Meta Platforms, Alphabet's Google, and Apple -- warning them that their AI-enhanced chatbots were causing problems.
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The legal officials aimed to "communicate our serious concerns about the rise in sycophantic and delusional outputs to users emanating from the generative artificial intelligence software promoted and distributed by your companies, as well as the increasingly disturbing reports of AI interactions with children."
The attorneys general added that these factors "indicate a need for much stronger child-safety
and operational safeguards. Together, these threats demand immediate action."
The recipients were requested to allow independent auditing of these products by state and federal authorities.
The effort is part of a tug-of-war between the states and the federal government regarding AI oversight. The Trump administration aims to restrict states from enacting their own laws on it, while certain officials, such as the authors of the letter, would like to place some limits on the technology.
Been there, done that
As mentioned, Microsoft has found itself on the business end of regulatory pushes before. It has always found a way to either gain compliance or settle for a compromise that doesn't significantly harm its business. While we can expect some level of legal and regulatory oversight to cover AI products in the near future, I believe that, regardless, Microsoft will find a way to operate effectively.
Eric Volkman has positions in Apple. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.