AI Reckoning. The Nasdaq Composite's worst day since June was actually a fairly decent session for a good chunk of Wall Street.
Though the index sank 2.6%, and the S&P 500 fell 1.2%, the Dow Jones Industrial Average closed slightly higher.
Despite the S&P's big drop, roughly 75% of its stocks rose on the day. The S&P 500 Equal Weight ETF, which counts every S&P 500 stock the same, actually rose 0.7%. It beat its market-cap weighted counterpart by 1.91 percentage points, its largest outperformance in more than two years.
The consumer staples sector rallied on Thursday to its first record since February, while utilities, healthcare, and financials all rose more than 1%. Real estate and materials were also up.
Even bonds shined. The yield on the 10-year Treasury note fell to 4.95%, its lowest level in more than a month. The 30-year yield was down to 5.29%. My colleague Karishma Vanjani argues bonds were finally acting like bonds again. She writes:
The surge in Treasuries comes alongside a serious slump in tech stocks. The Nasdaq Composite is down 2.5% as sentiment on AI has soured. Couple that with Middle East tensions flaring up, and pessimism on France -- whose 10-year bonds are yielding over 5% -- and it's not much of a surprise that money has moved into quality assets like Treasuries.
"It's been wild," said Raman Srivastava, global head of active management at BNY Investments, at a roundtable for reporters. "Bonds have the ability to be bonds again that wasn't true for a long-time post GFC."
On the flip side, the communication services and technology sectors each fell 3% today, while consumer discretionary fell more than 1%.
So what happened? Look no further than Meta Platforms' earnings.
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So About Those Meta Results...
Meta's earnings report seemed pretty good at first. The stock was rising in after-hours trading Wednesday night, as investors reacted to the better-than-expected revenue of $64.6 billion.
Earnings missed the mark, but only because of a $9.9 billion hit to the company's bottom line due to a legal settlement over child-safety issues.
But with Wall Street suddenly scrutinizing AI spending, Meta's first negative free cash flow since 2012 sent the wrong signal. My colleague Naomi Buchanan writes:
"Hyperscalers margins are forecast to decline next year, even while margins across the rest of the index are expected to expand," said 22V Research's quant team. "This suggests weaker operating leverage among hyperscalers, potentially reflecting rising depreciation and operating costs as AI infrastructure enters service."
These margin pressures are slowly showing up in earnings expectations. In fact, 22V reported that hyperscaler earnings expectations deteriorated for the first time since February of 2023 in September.
A sign that AI spending could actually weaken margins at firms like Meta sent shares of anything touching AI tumbling. Optical networking, chips, utilities, and industrials that have benefited from bullish expectations for AI spending were among the hardest-hit stocks in the S&P 500 on Thursday.
Mizuho's Daniel O'Regan sees this as a continuation of the "pretty violent reevaluation of the entire AI complex."
"The bigger issue is that capital markets are becoming more discriminatory toward AI, particularly around anything reliant on external financing," he writes. "That matters because a meaningful amount of data center capex is being underwritten by debt/equity rather than operating cash flow. If financing becomes more expensive or less available, eventually that has implications for capex."
Those are high stakes for next week's earnings, when Magnificent Seven companies including Alphabet, Microsoft, and Amazon.com are scheduled to report. It could prove to be one of the most critical stretches for the AI rally in years.
The Calendar
American Express, First Citizens BancShares, and SLB report earnings tomorrow.
S&P Global releases both its Manufacturing and Services Purchasing Managers' Indexes for October. Consensus estimates are for a 55.5 reading for the Manufacturing PMI and a 57.9 for the Services PMI. These compare to readings of 55.9 and 58.8, respectively, in September.
-- Dan Lam
What We're Reading Today
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