Good morning. AI giants have delivered an earnings shock.
Overnight, all three major US stock indices opened lower and continued to decline. At the close, the Nasdaq fell 1.38%, the Dow Jones dropped 0.25%, and the S&P 500 declined 0.3%. Alphabet Inc (NASDAQ: GOOGL) plunged 12%, wiping out $479 billion in market value. Most of the "Magnificent Seven" tech stocks declined. Meta Platforms Inc (NASDAQ: META) rose 1.97%, Apple Inc (NASDAQ: AAPL) gained 1.48%, Microsoft Corp (NASDAQ: MSFT) slipped 0.11%, Tesla Inc (NASDAQ: TSLA) fell 0.23%, NVIDIA Corp (NASDAQ: NVDA) dropped 0.80%, and Amazon.com Inc (NASDAQ: AMZN) tumbled 4.25%. Storage and optical communication sectors retreated, with SanDisk Corp (NASDAQ: SNDK) and Micron Technology Inc (NASDAQ: MU) each falling about 5%, Marvell Technology Inc (NASDAQ: MRVL) plunging 13%, Nebius Group NV (NASDAQ: NBIS) dropping over 5%, and CoreWeave Inc (NASDAQ: CRWV) declining nearly 5%.
After the US market close, two major negative developments emerged: first, Amazon's surging capital expenditures are pressuring profits, and second, Intel's revenue guidance fell below expectations. Specifically, Amazon reported capital expenditures higher than anticipated, while e-commerce revenue growth slowed, and the company's holiday season sales outlook suggested that the online business may struggle to rebound quickly. Amazon stated that third-quarter property and equipment spending exceeded $77 billion, far above analyst expectations. The company is continuously building data centers to meet AI service demand. These expenditures resulted in Amazon's free cash flow outflow of $42.4 billion. Amazon's revenue grew 12% to $201.9 billion; holiday season sales are projected at $240 billion to $247 billion, compared to analysts' average estimate of $244.5 billion. Although revenue from Amazon's cloud computing division AWS grew rapidly for the sixth consecutive quarter, the core business showed signs of weakening growth. Online sales grew only 2% to $68.5 billion, the slowest pace since early 2023. Intel Corp (NASDAQ: INTC) expects fourth-quarter revenue of $15 billion to $16 billion, versus a market estimate of $17.05 billion; adjusted earnings per share are expected at $0.25, compared to a market estimate of $0.43; adjusted gross margin is forecast at 38%, versus a market estimate of 42.8%.
Affected by these developments, in early Friday Asia-Pacific trading, Nasdaq futures fell 1.4%. In after-hours US trading, Intel dropped over 20%, and Amazon plunged 12% before narrowing losses to 7.35%.
Notably, data released on Thursday showed that the US September core PCE price index rose 0.3% month-over-month, in line with estimates of 0.3% and up from the prior reading of 0.2%. US initial jobless claims for the previous week came in at 194,000, versus an estimate of 198,000 and the prior reading of 194,000. US third-quarter GDP on a seasonally adjusted annualized basis was 3.4%, beating estimates of 3.2% and up from 2.2% in the prior quarter. US Treasuries held steady after the PCE inflation, GDP estimate, and jobless claims data were released. Some analysts suggest that rising international oil prices driven by Middle East geopolitical conflicts pushed energy costs higher, contributing to a rebound in headline inflation in September. Markets are watching whether companies will pass fuel costs on to consumers. Core PCE is the inflation gauge the Federal Reserve watches most closely, and its services component reflects whether domestic price pressures remain stubborn. Should this sub-index rise further, financial markets will increasingly bet that the Fed will raise rates by 25 basis points at its December policy meeting.
In commodities, gold and silver prices declined. Spot gold fell 1.13% to $4,021.23 per ounce; spot silver dropped 3.34% to $52.14 per ounce.
ECB Holds Rates Steady as Lagarde Announces Early Departure
The European Central Bank announced on Thursday that it would keep the deposit facility rate unchanged at 2.5%, with the main refinancing rate and marginal lending rate maintained at 2.65% and 2.9% respectively. All three rates matched market expectations and aligned with predictions from nearly all economists in a Bloomberg survey. Meanwhile, ECB President Christine Lagarde announced earlier that day that she would step down early in February next year, several months before her term expires, citing a desire for greater freedom of expression on issues including political turmoil in France. Following the decision, market reactions were notable: the euro fell 0.4% against the dollar to 1.1111, touching a 17-month low; the yield spread between French and German 10-year government bonds narrowed by 4 basis points to 150 basis points; traders simultaneously reduced rate hike bets, compressing the priced-in tightening through the end of 2027 to 68 basis points; and major European stock indices closed higher collectively, with the UK FTSE 100 up 0.29%, the French CAC 40 up 1.31%, the German DAX 30 up 1.36%, and the FTSE MIB up 0.40%.
Analysts: Small and Mid-Cap Stock Volatility May Intensify
On October 29, affected by significant declines in the three major A-share indices, all four domestic stock index futures fell notably. Among them, the CSI 500 stock index futures and CSI 1000 stock index futures main contracts each dropped nearly 3%. A handful of sectors gained, including coal, banking, oil, defense and military, and food and beverage, while communications, electronics, building materials, and machinery sectors led declines, with the communications sector falling over 5%.
"Downward pressure on A-shares is mainly concentrated in two dimensions: overseas interest rate policy and corporate earnings," said Li Yansen, chief macro analyst at Founder CIFCO Futures Research Institute. The Federal Reserve kept its benchmark rate unchanged, but two voting members supported a rate hike. The policy statement upgraded the economic description from 'moderate' to 'strong,' signaling a hawkish stance. The 10-year US Treasury yield remains above 5%, pressuring global risk assets. Additionally, US tech stock earnings diverged, with some missing expectations, intensifying bull-bear contests in overseas markets. South Korean stocks also adjusted in tandem, hitting domestic small and mid-cap growth and tech stocks more noticeably.
"Domestically, third-quarter profit declines at some insurance institutions weighed on sector performance. Insufficient long-term incremental capital, deleveraging of on-market positions, and weak market sentiment all contributed. The domestic economic fundamentals are in a weak recovery phase, maintaining a pattern of external demand as primary and domestic demand as supplementary. However, current market dynamics are not focused on fundamentals, and improvements in fundamentals are unlikely to reverse market weakness," Li Yansen said.
Chen Chang, stock index futures analyst at Yide Futures, cautioned that as US midterm elections approach, uncertainties in the Middle East geopolitical situation persist, and whether US data center construction will be affected by the elections and whether US AI stocks are in a bubble remain to be observed. On Thursday, Microsoft and Google successively reported third-quarter results, with Google's free cash flow and profits both under pressure, sending its stock down 10%. Before Thursday's A-share open, Samsung's third-quarter results also fell short of expectations, pressuring AI supply chain valuations across Asia-Pacific markets. This indicates that, with no new breakthroughs in AI and high financing costs, markets are highly focused on financing pressures across the AI supply chain.
Looking ahead, Chen Chang believes it is crucial whether broad-based ETFs can maintain sustained large inflows and whether clearer, more definitive policy signals to stabilize market expectations will emerge. The CSI 500 and CSI 1000 constituent stocks have relatively higher technology sector weightings, and broad-based ETF inflows are relatively lower compared to the CSI 300, resulting in greater volatility.
"In terms of operations, investors are advised to take a wait-and-see approach, paying attention to whether there are clear improvements at the macro and industry levels, changes in turnover across the Shanghai and Shenzhen markets, and the impact of non-market factors," Chen Chang said.
Li Yansen believes the Shanghai Composite Index may see a technical rebound after overselling, and advises cautious operations, with subsequent strategies prioritizing hedging and risk avoidance. At the same time, arbitrage opportunities can be monitored: first, the reverse arbitrage between the CSI 1000 stock index futures 2703 contract and the 2612 contract; second, spread long opportunities arising from the upward price ratio of large-cap versus small-cap stocks.
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