AI Stocks Stumble on Profit Fears as Bond Yields Hit 17-Year High

AI Stocks Face a Reality Check

The market is beginning to look past the hype surrounding artificial intelligence and is asking tougher questions about profits. This trend is not only affecting software and chip firms but is now reshaping the entire infrastructure trade, from data centres to the power plants that fuel them.

Wall Street's High-Stakes Bet

A game-changing moment appears to be underway as Wall Street wades deeper into AI financing. Nvidia is reportedly working with giants like BlackRock and Goldman Sachs to assemble a staggering $500 billion to finance AI infrastructure. The plan seems to involve turning AI hardware into its own asset class, potentially creating products like “collateralised chip obligations.”

This strategy is uncomfortably similar to the derivative packaging that contributed to the 2008-09 financial crisis. Should AI adoption fail to meet the sky-high expectations, the fallout could cascade through these exotic new financial products. Adding to the frenzy, AI firm Anthropic is expected by some investors to go public at a valuation of at least $2 trillion, which would be the largest initial public offering in history.

Cisco's Margin Worries Trump AI Boom

Cisco announced record quarterly revenue of $17.3 billion and adjusted earnings of $1.22 a share, beating expectations. It also revealed its AI infrastructure orders for the year hit a massive $9.3 billion. Yet, its shares dropped 5.9% in pre-bell trading.

The reason? Management warned that profit margins could be squeezed because they are selling more physical hardware and less high-margin software. The strong results and rosy forecast were not enough to impress investors, particularly as the stock had already climbed more than 60% this year. In a market hungry for profits, not just sales, this was enough to spook investors. Cisco is not alone, with other hardware firms like Super Micro Computer and Coherent also seeing strong demand driven by the AI gold rush.

Cerebras Punished Despite Positive Spin

The story was even starker for Cerebras Systems. The AI chip maker was punished by investors after issuing a worse-than-expected revenue figure for the second quarter, sending its shares plunging by 15% in extended trading. The company's order backlog also remained flat at about $25 billion, suggesting that the total value of unfulfilled orders did not grow and fuelling worries about future demand.

Despite the market's brutal reaction, CEO Andrew Feldman told reporters that AI demand is “through the roof.” He noted that companies are willing to pay a premium for Cerebras’ specialty chips designed for 'inference' – the process of using a trained AI model to make predictions. However, in the current climate, a revenue miss can erase all the goodwill generated by rapid growth.

The Power Grid Problem: From Generators to Equipment

A new dynamic is emerging in the AI infrastructure space. While power generation companies were initially seen as the primary beneficiaries of energy-hungry data centres, regulatory hurdles and construction delays are shifting the opportunity. Stock performance is splitting, with equipment makers like GE Vernova and Caterpillar significantly outperforming power producers such as Constellation Energy and Vistra this year.

Two major US power markets have thrown a spanner in the works: Texas has paused fast-tracked grid connections for data centres, and the PJM grid, which serves the eastern US, is overhauling its system after failing to secure enough power for mid-2028. With an estimated 60% of data centre projects planned for 2027 yet to even break ground, the momentum is moving towards the companies building the new capacity—the 'picks and shovels' of the energy boom.

Google's Consumer AI Bet

Meanwhile, Google is taking a different approach by integrating AI directly into its consumer hardware. The new Pixel 11 phone lineup has been launched with higher starting prices, a move the company blames on rising memory costs. The real bet is that its new Gemini Intelligence software, which aims to automate tasks across different apps, will be compelling enough for consumers to upgrade, creating a new front in its competition with Apple.

Bond Yields High, But Inflation Shows Signs of Cooling

The US government's recent sale of ten-year bonds saw investors demand an interest rate, or yield, of 4.683%. This is the highest level since 2007, just before the global financial crisis. In simple terms, this means the cost of borrowing is rising across the economy. A higher guaranteed return from safe government bonds makes riskier assets like stocks less attractive.

However, new data has provided a glimmer of hope. The US Consumer Price Index (CPI) showed that prices rose just 0.1% in July, matching forecasts and bringing annual inflation to 3.4%. This is the clearest signal in months that price pressures are finally starting to weaken. This softer reading complicates the outlook for central banks; while high bond yields reflect current borrowing costs, easing inflation could give the US Federal Reserve reason to pause its programme of interest rate hikes. Investors are now watching for the upcoming Producer Price Index, which tracks wholesale inflation, for further confirmation of this trend.

At the same time, the US federal budget deficit expanded to $432.3 billion in July, driven by rising Medicare costs and the ever-increasing interest payments on national debt. Interest expenses now represent around 14% of the entire federal budget, a trend that adds another layer of complexity to the economic picture.

High-Stakes Earnings Ahead for Virgin Galactic

Virgin Galactic (SPCE) is set to report its second-quarter results, and the numbers that matter have little to do with revenue or profit. The company's future hinges on its cash reserves and its timeline for resuming commercial flights. With the stock already up 29% in recent weeks, expectations are running high.

The Cash Countdown

The company is burning through approximately $90 million per quarter. It's expected to report a cash balance of around $213 million, which gives it a very thin margin for error. Its own auditors have previously flagged "substantial doubt about the Company’s ability to continue as a going concern." The key question is whether it can start generating meaningful revenue from flights before the money runs out.

A Short Squeeze Powder Keg

Adding to the drama is the enormous number of investors betting against the stock. Around 40% of Virgin Galactic's available shares have been sold short – a practice where investors borrow shares to sell them, hoping to buy them back later at a lower price. This creates a volatile situation:

• If Virgin Galactic announces concrete flight dates and a healthy cash position, these short sellers could be forced to buy back shares in a hurry, potentially causing the price to surge dramatically.
• If the company announces any further delays or a worse-than-expected cash burn, it will vindicate the short sellers, and the share price could fall sharply.

In Other News

• Wall Street Eyes Sports Teams: Interest in professional sports franchises as an asset class is growing. Shares in Madison Square Garden Sports are up 60% this year, buoyed by the recent sale of the Los Angeles Lakers. A group led by former Disney CEO Bob Iger and investor Joshua Kushner acquired a majority stake in a deal valuing the team at a record $12.5 billion. The valuation represents a significant gain from the $10 billion figure when the seller acquired the stake less than a year prior, lifting valuations for comparable teams like the New York Knicks.
• Oil Prices Volatile Amid Supply Questions: Global oil markets are on edge. Prices have been pushed higher by fears of supply disruption following attacks on vessels in the Red Sea. Compounding these fears, ship traffic in the vital Strait of Hormuz has fallen to near three-month lows amid tensions between the US and Iran. However, a surprise large build in US crude inventories has injected some short-term downward pressure.
• Japanese Yen on Intervention Watch: The Japanese yen is hovering just under the critical 160 per US dollar level. This is a significant threshold that has previously triggered intervention from Japanese officials to strengthen their currency. The US has also recently participated in efforts to stabilise the yen.
• Musk's Ambitions for SpaceX: CEO Elon Musk revealed that the Starlink satellite internet service now has 22 million mobile subscribers. He is also aiming for the company to operate 10 gigawatts of AI computing power by the end of 2027, a massive tenfold increase.
• UK Economy Holds Firm: The British economy grew by 0.4% in the second quarter. While a slowdown, it shows resilience given rising energy prices and global disruption, complicating the Bank of England's next move on interest rates.
• Tokenized Assets Gain Momentum: The market for tokenized equities, which are digital representations of real-world shares, has now expanded to around $38 billion. Major players like JPMorgan are now testing these assets with dozens of firms, while traditional exchanges like the NYSE and Nasdaq are developing their own platforms, signalling a potential new battleground for finance.
• South Korean Market Rallies: Spurred by the global revival in AI-related stocks, South Korea's benchmark Kospi index has officially entered a technical bull market.
• Wendy's in Play: Shares in the burger chain Wendy's have been volatile. After a social media-driven campaign pushed the stock up 25% and it lost its spot as the second-largest US burger chain, it jumped again on reports that activist investor Nelson Peltz is assembling a group to bid for taking the company private.
• Trump Media Faces Lawsuit Over API: Trump Media & Technology Group is being taken to court by a media outlet and a non-profit group over its new 'Truth API' service. The service provides faster access to posts on its Truth Social platform for paying customers, sparking fears that it could disadvantage retail investors and create an uneven playing field for information.
• Lettuce Prices Plummet: In a strange twist in the inflation story, US lettuce prices saw their largest one-month decline on record in July, falling over 16% as a cyclospora outbreak led consumers to avoid the vegetable.

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NOTE: This content is for informational and educational purposes only and does not constitute financial advice. Always do your own research. Not financial advice (NFA).