Tech Giants Tumble as AI Spending Costs Spook Investors

Tech's AI Spending Reckoning

Disappointing updates from Amazon and Intel have rattled the technology sector, revealing a growing impatience among investors with the colossal costs of the artificial intelligence arms race. After a bruising week that saw Google's parent company, Alphabet, suffer one of its worst-ever single-day declines, the market is no longer just rewarding growth; it is demanding profitability.

Amazon: Strong Growth, Negative Cash

Amazon's shares fell over 7% in pre-market trading despite its cloud computing division, Amazon Web Services (AWS), posting its fastest growth in nearly five years at 39%. A miss on both revenue and profit expectations overshadowed the impressive top-line figure, but the main concern for investors was a deeply negative financial metric.

The company's free cash flow—the money left over after paying for operational expenses and large investments—swung to a negative $42.4 billion over the last 12 months. This was a direct result of pouring an enormous $77.26 billion into property and equipment, mostly for data centres, in just three months. This stands in stark contrast to Microsoft, which demonstrated strong cloud growth alongside positive cash generation and is reportedly planning a $25 billion bond sale to fund further AI expansion from a position of strength.

Intel: A Company Divided

Intel's results presented an even bigger shock, with shares plunging 25% in pre-market trading. The stock had enjoyed a strong run, rising about 150% this year before the report, which amplified the scale of the decline. The company's results showed two conflicting businesses: its Data Centre and AI division saw revenues jump by an incredible 78%, but this was completely undermined by its traditional PC chip business, which shrank by 5%.

This weakness led Intel to issue a fourth-quarter revenue forecast of between $15 billion and $16 billion, well below the $17.1 billion analysts had expected. The company’s finance chief warned that the firm expects "the PC slowdown continuing at least through the first half of next year." The bleak outlook was also impacted by a recent fatal plant explosion. Despite the challenges, CEO Lip-Bu Tan stated, "Our immediate priority is to unlock additional supply to meet extraordinary demand."

The Wider AI Ecosystem

While Nvidia continues to dominate the AI chip market, the industry's rapid expansion is creating opportunities for a wider group of suppliers. Shortages of essential components like memory, server processors, and power management parts are pushing prices higher. This is benefiting companies such as storage specialist SanDisk and power component maker Monolithic Power Systems, as data centre operators race to secure capacity.

Crypto Market Shaken by Major Security Breach

The cryptocurrency world is on high alert following the largest heist in its history. A suspected security breach at Binance, the world's largest crypto exchange, has impacted as much as $6.3 billion in assets. The news sent the price of Bitcoin below $78,000 and caused related stocks like Coinbase to fall.

Binance's co-CEO confirmed the incident, stating an initial investigation pointed towards a compromised laptop belonging to a DevOps engineer as the source. He assured customers that "your money is safe, and we're covering every loss." While no group has been officially blamed, there is widespread speculation that the attack was carried out by a state-backed actor, with some pointing to North Korea. This mirrors the 2025 heist on the ByBit exchange, which the FBI later attributed to the same country.

In a coordinated response, a significant portion of the assets have been immobilised. Binance has frozen $3 billion, while stablecoin issuers Tether and Circle have frozen $1.56 billion and $800 million, respectively. Blockchain analysis firm Arkham has traced wallets allegedly involved in the incident, highlighting the massive scale of the event and serving as a stark reminder of the operational risks in the digital asset space.

Adding to a mixed week for the sector, crypto exchange Coinbase reported a 35% fall in revenue to $1.22 billion as trading activity on its platform dropped. It managed to post a profit of $719 million, but this was almost entirely due to unrealised gains on its own crypto holdings, not from its core business operations.

The Global Economic Tightrope

Central banks around the world are grappling with resilient economies and stubborn inflation, creating a complex picture for investors. The path forward for interest rates in the US, Europe, and Japan remains a key focus.

US Economy Runs Hot, But Consumers Feel the Strain

The United States economy grew at a brisk 3.4% annual pace in the third quarter, surpassing expectations. However, this strength came with a clear warning sign. The Federal Reserve's preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, rose to 3.6% in September, its fastest monthly climb since March, driven largely by a 9.2% jump in fuel prices.

Even with volatile food and energy costs stripped out, the 'core' PCE index edged up to 3.1%, showing that underlying price pressures are not fading quickly. Digging deeper, the data shows American households are spending more than their incomes are rising, forcing them to dip into their savings. The personal saving rate has fallen to just 3.8%, a thin cushion that suggests current spending levels may not be sustainable. This robust growth and rising inflation increase the likelihood that the Fed will keep interest rates higher for longer.

Europe Holds Rates, But a Hike Looms

The European Central Bank (ECB) kept its key interest rate unchanged at 2.50%. However, with Eurozone inflation at 3.8%—driven by a nearly 19% jump in energy costs—the decision was not straightforward. ECB President Christine Lagarde, who also announced she will step down nine months early in February 2027, confirmed that a rate rise was debated. Markets are now pricing in a high probability of an ECB rate hike in December.

Japan Signals a Major Policy Shift

The Bank of Japan (BoJ) held its interest rate at 1.25%, but the accompanying statement contained a pivotal message: it believes underlying inflation is now consistent with its 2% target. For years, Japan has been known for ultra-low rates. This declaration is the clearest signal yet that the BoJ is preparing to raise rates further, a move that could strengthen the yen and impact global financial markets.

Corporate Highlights & Market Movers

• Energy Giants Thrive: Oil majors are reaping the benefits of high energy prices. ExxonMobil and Chevron both reported strong earnings, with Chevron topping forecasts. Both announced plans to return more money to shareholders, while Shell boosted its share buyback programme to $5 billion.
• Pharma's Spending Spree: Major pharmaceutical firms including Eli Lilly, Merck, and Bristol Myers Squibb are spending heavily on acquisitions and licensing to find new growth drivers before patents on their major drugs expire.
• Reddit Shares Tumble: Social media platform Reddit saw its shares fall over 20% after its CEO warned that the number of total daily unique visitors could see a double-digit decline in the fourth quarter.
• NatWest's Loan Concerns: Shares in the UK banking group fell after it more than doubled its provisions for bad loans to £277 million in the third quarter, signalling concerns about the health of the UK economy.
• AstraZeneca's Profit Beat: In contrast to NatWest, pharmaceutical giant AstraZeneca saw its shares rise after reporting profits that beat analyst forecasts.
• Delivery Market Consolidation: In a major deal for the food delivery market, DoorDash announced it is acquiring grocery delivery firm Instacart for approximately $17 billion.
• Caterpillar's Data Centre Boom: Industrial heavyweight Caterpillar reported a record order backlog, driven by surging demand for its power generation equipment from data centres. Sales jumped 30% in the division, with some orders stretching into 2029.
• Mixed Consumer Fortunes: Starbucks reported its fifth consecutive quarter of sales growth as its turnaround strategy pays off. Burger King also saw sales jump on the back of value deals. However, footwear maker Crocs surged over 25% after a strong earnings report and raised guidance.
• BYD Under Pressure: The Chinese electric vehicle maker, which previously overtook Tesla in sales volume, posted a profit that missed expectations. The company is facing headwinds from slowing exports due to tariffs and softer demand in its home market.

Shifting Consumer Habits Reveal Price Sensitivity

This year's Halloween spending provides a revealing look into the consumer mindset. While overall spending is set to hit a record $13.5 billion in the US, candy makers are not celebrating. Years of aggressive price increases—with candy and gum prices climbing 44% over five years—are finally pushing shoppers to cut back, with sales falling nearly 7% in the month leading up to the holiday.

Interestingly, the recent plunge in cocoa prices from record highs has not yet translated into relief at the checkout, as manufacturers are still working through older, more expensive supply contracts. In a clear sign of budget reallocation, spending on reusable decorations has overtaken candy. This has benefited home improvement retailers, who have seen strong sales of popular items like giant skeletons, suggesting consumers are favouring purchases that offer value beyond a single use.

---

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).