Tech Stumbles Again on AI Spending Doubts; Rotation into Value Continues – Try the Pork Chops with Vinegar Peppers

Things You Need to Know

• Tech gets hit again…but buyers find opportunities elsewhere.
• Amazon and Intel got sold, Asia takes the next punch.
• Bonds rally as investors seek protection.
• Growth holds up, inflation stays hot—and real consumer spending stalls.
• Oil rebounds as Middle East tensions remain unresolved.
• Try the Pork Chops with Vinegar Peppers

And here we go again…..Tech stocks came under pressure Thursday as GOOG’s disappointing results reignited the debate over AI spending, cash flow and how long investors should wait for an acceptable return. GOOG plunged 12.6% as investors had to consider disappointing sales and the cost of its AI ambitions. The concern is the same. How much are you spending, how are you financing it, and when does the cash come back?

Investors have heard the promises. Now they want to see the results and GOOG did not deliver – Ad revenues of $82 billion was $1.4 billion below the estimates, Capex was $51.4 billion pushing FCF (free cash flow) to NEGATIVE $9.1 billion and yes, Cloud growth was strong, just not strong enough to calm the fears….….and the selling (in tech) was not limited to just GOOG….and like I said – ‘here we go again’….Semi’s lost 1.6%, Cyber lost 2.7%, Software down 3.56%, Memory down 4.4%, Disruptive Tech down 0.2%, The Growth Trade (SPYG) lost 1.5%, Quantum names – QTUM lost 2%.

But beneath the headline losses, a different story was unfolding. Buyers stepped into healthcare +2.4%, financials +0.8%, real estate +2.2%, utilities +1.5%, consumer staples + 1.6%, small caps rose by 1.6%, the Value Trade (SPYV) gained 0.9% and is now up 13.8% ytd vs. Growth up 12% ytd. Think about that – boring is outperforming sexy! A reminder that diversification matters!

More than 400 stocks in the S&P advanced even as the index ended down 0.3% and that was visible when you compared it to the Equal Weight S&P which closed UP 1.2% That again reiterates the boring vs. sexy argument. So, if you own a diversified portfolio – your experience looked very different than what the market suggests.

At the end of the day—the Dow lost 0.25%, the S&P gave back 0.3%, the Nasdaq lost 1.4%, the Russell gained 1%, the Transports gained 1%, The Equal Weight S&P added 1.2% while the Mag 7 gave up 1.8%.

On the economic front – the news was mixed…. Third-quarter GDP showed the economy growing at a 3.4% annualized pace, up from 2.2% in the second quarter. Investment, consumer spending and government spending contributed to the expansion. Weekly initial jobless claims fell to 194,000, while continuing claims declined to 1.701 million.

On the other side – September’s inflation report (the PCE) will keep the pressure on the Fed. Headline PCE prices rose 0.5% for the month and 3.6% from a year earlier. Core PCE, which excludes food and energy, increased 0.3% monthly and 3.1% annually – both higher vs. last month.

Personal spending rose 0.5% – leaving it below the expectation, while Personal income rose just 0.2%, again below the expectation. And that challenges the claims that the consumer is ‘buying’ more. What the consumer is doing is SPENDING more without buying more goods and services.

Meanwhile – bond buyers went on a shopping spree – the TLT & TLH both gained 0.6%. The 2-yr yield fell 10 bps to end the day yielding 4.59%, the 10 yr? It fell 8 bps to end the day yielding 4.93% while the 30 yr fell 4 bps to end the day at 5.29%. This morning they are essentially unchanged and what that tells you is that investors were looking for a shelter in the storm….. And the 2-year yield falling faster than the 10- and 30-year suggests that investors are dialing back expectations for how high the Fed might need to push rates.

Oil did nothing to help – WTI fell 0.8% to end the day at $102 and this morning it is up 1.5% at $103.50 as those ongoing concerns about a US strike on Iran – that could threaten energy supplies takes center stage again. In the end – diplomacy takes some of the premium out of prices while military action puts it right back in. In any event – $100+ oil is not helpful to anyone…

Gold continued to just churn in the $4,000/$4,250 trading range…falling 1.2% to end the day at $4,020. But this morning is a different issue…. Gold fell 1.4% – breaching support to trade down to $3,965 overnight. This morning at 5:30 – Gold rebounded a bit – and is trading at $3,990. The move a direct result of higher oil prices and a ‘tech selloff’ that is gripping global markets.

The key is to see what gold does now – because a failure to hold $4,000 could see it trade down to the $3,500 level according to the chart.

And then after the bell yesterday we heard from both AMZN and INTC….and THAT wasn’t very pretty as well.

Amazon fell 7.3% after earnings of $1.89 missed the $1.97 estimate, and revenues of $201.94 billion came in below expectations. But the bigger issue? SPENDING. Quarterly capex hit $77.3 billion – about $20 billion MORE than expected—while trailing 12-month free cash flow turned NEGATIVE to the tune of $42.4 billion. AWS growth remained strong, but slowing online sales growth and a cautious holiday outlook left investors asking the same question…. How much more are you spending, and when does the cash come BACK?

Intel -plunged 23% after hours. They BEAT adjusted earnings expectations, delivering 52 cents vs. the 40 cents expected. Revenue of $16.5 billion was roughly in line, depending on whose estimates you use. The real problem was what comes NEXT…. Fourth-quarter adjusted earnings guidance of just 25 cents was more than 40% BELOW expectations, while the midpoint of its revenue forecast was 9% below estimates. Management pointed to continued weakness in PCs and constraints on server-chip supply. Yes, the strong AI demand is great, but they still have to deliver the chips.

As a result of these reports – tech around the world is in SELL mode…….. Nasdaq futures are down 2.3%, South Korea’s Kospi fell 3.5% as Samsung and SK Hynix sank. Taiwan down 2.5%.

The question around the globe is the same: How much are you spending, how are you financing it, and when does the cash come BACK?

Money is seeking shelter in US Treasuries, the yen and the Swiss franc. But keep this in perspective…. More than 400 S&P stocks advanced yesterday, and 9 of the 11 sectors gained ground. That points to a rotation OUT of crowded tech positions, with buyers still finding opportunities elsewhere.

Is the AI trade over? Hardly. Had parts of it gotten stretched? Sure. Could investors be selling existing holdings to raise money for opportunities like Anthropic? Maybe – but that is not an explanation for this selloff. The clearer issue is that investors are demanding more evidence that the spending will deliver on the promises.

Check your exposure…. How much tech do you actually own, including what sits inside your ETFs and mutual funds? Are you more concentrated than you intended? So far, the breadth suggests rotation, not liquidation.

Remember – more than 400 S&P stocks advanced yesterday. 9 of the 11 sectors gained ground, so that points to a rotation OUT of crowded tech positions and into other ‘safer’ positions..

European markets are mixed…but are leaning lower.

US futures are lower. Dow futures down 26 pts, S&P’s down 85 pts (think tech), the Nasdaq down 700 pts while the Russell is down 18 pts.

The S&P closed at 7,720 – down 23 pts. We are still closer to the top than not…and remain in the 7500/7800 trading range…. Like I said yesterday – there has been plenty of movement, plenty of headlines, but no decisive breakout or breakdown. With futures pointing lower, watch whether buyers defend intermediate support at 7,610. The bigger level remains 7,500—the bottom of the recent trading range.

Nasdaq – broke below its intermediate trendline yesterday – bringing the longer-term trendline near 25,050 into focus – down 3.9% below yesterday’s close. Nasdaq futures are already down 2.3%.

And it is Friday…. AGAIN. Last night’s AMZN and INTC reports gave traders and algos fresh reasons to sell. Today, I believe tech buyers will test the will of tech sellers…. How anxious are they? We are about to find out.

If you’d like to discuss your goals, evaluate the risk in your portfolio or simply get a second opinion, give me a call at 561-931-0190 or better yet – click on this link to connect. https://slatestone.com/contact-us/

I’m always happy to provide a complimentary portfolio review and risk assessment.

Take good care,

Kp

[email protected]

Source: Bloomberg, CNBC, Reuters, Wall Street Journal

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