Tech Stocks Tumble on AI Spending Fears as Bond Yields Plummet

Tech Sell-Off Deepens as AI Spending Scares Investors

A sharp reversal in technology shares shook the market, as the Nasdaq Composite experienced its worst day since June with a 2.6% decline. The sell-off was triggered by a sudden change of heart towards Meta, the parent company of Facebook, which fell nearly 7% despite reporting record sales.

Investors looked past the strong revenue and focused instead on the immense cost of the company's artificial intelligence ambitions. Meta's heavy spending on new data centres has pushed its free cash flow—the money left over after paying its operational bills—into negative territory. The firm is also reportedly planning a stock split to help fund its AI expansion while ensuring founder Mark Zuckerberg maintains voting control. These moves have raised serious questions about when these enormous AI investments will actually turn a profit.

Contagion Hits AI Sector

The nervousness quickly spread to other companies at the centre of the AI boom, with investors now closely watching upcoming earnings from fellow big spenders Amazon and Alphabet for signs of similar capital-intensive plans.

• Nvidia, the leading chipmaker for AI, saw its shares fall by 4.4%.
• Rival chip designer AMD dropped by 8.1%.
• CoreWeave, which rents out computing power for AI tasks, tumbled 10%.
• South Korean chipmaker SK Hynix scrapped the planned US public offering for its Solidigm memory-chip unit, citing difficult market conditions.
• The cost to insure the debt of AI-related firms against non-payment has also climbed, a clear signal that lenders are getting nervous.

Nvidia's chief executive, Jensen Huang, highlighted the scale of the challenge, telling US media that the demand for capital to fund AI development is "much greater than the availability of the capital." This suggests a bottleneck for growth that the market is only now beginning to price in. One notable exception was Apple, which bucked the trend and saw its shares make gains.

The IPO Litmus Test

Adding to the sector's drama, AI firm Anthropic is reportedly preparing to make its Initial Public Offering (IPO) filing public. An IPO is the first time a private company sells its shares to the public. While Wall Street analysts have floated a valuation as high as $2 trillion, the market's reaction to Meta's spending may create a more challenging environment.

Further complicating the picture, rival OpenAI is reportedly finalising a funding round valuing it at $1.25 trillion, a reduction from a previous $1.4 trillion valuation, suggesting even private investors are becoming more price-sensitive. Anthropic will now be under immense pressure to justify its own spending and path to profitability.

Bond Market Rallies as Rate Hike Bets Evaporate

While stock markets were falling, a different story unfolded in the bond market. The yield on the 10-year US Treasury bond, which influences borrowing costs for everything from mortgages to corporate loans, fell sharply to 4.95%. This was its biggest one-day drop since March 2023.

This 'flight to safety' indicates that investors were selling riskier assets like stocks and buying safer government bonds. The trend extended to Asia, where Japanese government bonds and the yen also surged in demand. The move was also fuelled by a dramatic shift in expectations for future interest rate moves by the US central bank, the Federal Reserve.

Traders now believe there is only a 7.2% probability of a rate hike at the Fed's next meeting. Just one month ago, they saw it as a more than 55% likelihood. This suggests the market is increasingly convinced that the economy is slowing and that the cycle of rate increases is over, despite conflicting signals from rising energy prices.

Geopolitical Tensions Push Oil to Five-Month High

Contradicting the bond market's view of a cooling economy, oil prices surged. Brent crude, the global benchmark, hit $115 a barrel before settling 4% higher at $113.17, its highest closing price since May.

The primary driver was an escalation of conflict in the Middle East, which led Saudi Aramco to evacuate its main headquarters in Dhahran. While there have been no reports of a halt to Saudi oil production, the move spooked energy markets. Further pressure came from data showing that US crude oil stockpiles fell by over 3 million barrels last week, indicating healthy demand.

Wall Street's New Oil Playbook

With oil refiners having already seen strong gains, some analysts are now looking for new opportunities among the companies that extract and transport crude oil.

• Goldman Sachs has highlighted producers like ConocoPhillips ($COP) and Occidental Petroleum ($OXY) as well-positioned. The bank also sees potential in pipeline operator TC Energy ($TRP).
• Bank of America has forecast that Brent crude will average $100 per barrel in the final quarter of 2026, before falling back to around $77 by the third quarter of 2027, suggesting the current price spike may not last.

Investors will be watching earnings reports from giants like ExxonMobil ($XOM) and Chevron ($CVX) on October 30th for clues on the sector's direction.

Economic Picture Mires with Job Market Worries

Economic data from around the world painted a downbeat picture, with consumers showing signs of strain and new concerns emerging about the impact of technology on jobs.

UK Consumers Tighten Belts

Economic data from the UK revealed that consumers appear to be tightening their belts.

• Retail sales volumes fell by 0.4% in September, a worse result than the 0.1% decline that was expected. Unseasonably warm weather was blamed for weak sales of autumn clothing ranges.
• Consumer confidence also dropped significantly, falling 11 points to -24 in October, according to GfK data.

The job market for young people is also showing weakness. A recent report revealed that job opportunities for 18-to-24-year-olds in the high-paying technology and finance sectors have fallen by 22% over the last three years.

US Labour Market and AI's Influence

In the United States, the labour market appears stable on the surface, with weekly jobless claims falling to a low 194,000. However, beneath the headline numbers, a new trend is emerging. Through September, US employers cited artificial intelligence as the reason for over 120,000 job cuts, making it the leading single driver of layoffs this year as companies redirect spending towards automation.

Other Company and Market News

The Musk Dossier

Elon Musk's various enterprises remained in the spotlight. SpaceX stock fell 9.14% as a lock-up period ended, allowing early investors to sell shares. The company also faces a lawsuit alleging its profits were boosted by natural gas turbines operating illegally and polluting local neighbourhoods. Separately, it was reported that Musk complied with a request from former President Trump to restore full military-grade Starlink satellite services for use in Ukraine. Meanwhile, it was reported that Musk has invested around $1 billion in Skydance, the media company that now owns Paramount and Warner Bros.

Defence Sector Sees Record Orders

Major defence contractors are seeing their order books swell to record levels. Lockheed Martin ($LMT) now has a work backlog of $292 billion, driven by a 24% surge in missile sales. Despite this, the company's valuation has shrunk relative to its earnings. Competitors are in a similar position, with Northrop Grumman ($NOC) and RTX ($RTX) also reporting record backlogs of $109.6 billion and $340 billion respectively, as allied defence budgets rise in response to global conflicts.

Other Corporate Movers

• Moderna ($MRNA): The biotech firm's shares tumbled 18% after data on its cancer vaccine candidate, being developed with Merck, was leaked ahead of a major medical conference.
• Volvo Car: The Swedish carmaker's shares plunged after it reported a quarterly loss, citing weakness in both the US and Chinese markets.
• SK Hynix: The chipmaker's shares rebounded in Seoul after it cancelled the IPO for its US-based Solidigm unit, a move seen as preserving value within the parent company.
• Lam Research ($LRCX): The chip-equipment maker reported a record quarterly revenue of $8.22 billion, driven by strong demand from AI and memory chip manufacturers.
• Blackstone: The global property giant reported a 9.2% fall in quarterly profit. Rising interest rates have hurt the value of its real estate portfolio, though its investments in data centres and warehouses remain strong.
• Live Nation ($LYV): The concert promoter could face a forced breakup after a federal jury found it maintained an illegal monopoly in ticketing.
• Spotify ($SPOT): The music streaming service is tightening the rules for its 'Family' plan, in a move similar to Netflix's password crackdown, to convert more shared accounts into individual paying subscribers.
• Comcast ($CMCSA): The media giant beat estimates, with its Peacock streaming service turning profitable for the first time on the back of a 17% subscriber increase.

Global Headwinds

• France's Debt: The cost for the French government to borrow money has hit its highest point since 2002 as investors sell French bonds amid widespread protests over the rising cost of living.
• Crypto Outflows: US-based spot Bitcoin ETFs saw net outflows of over $635 million in a single day, the largest withdrawal since June.
• Chinese Capital Flight: Wealthy Chinese individuals are reportedly moving funds into US banks to shield them from a widening tax crackdown by Beijing.
• Japan's Inflation: Core inflation in Japan rose to 2.1% in September, its highest level this year and creeping above the central bank's 2% target.
• US Semiconductor Push: The US government plans to invest $389 million and take minority stakes in four power semiconductor firms to boost domestic production and reduce reliance on overseas chipmakers.

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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).