AI Earnings Disappoint as Confidence Shifts
Wall Street went through turbulence in the just-ended October, known as Black October. AI concept stocks, previously the main driver of the market, became the market's biggest source of fear in the last week of October, as investor confidence shifted. Investors are rotating from artificial intelligence-related stocks into defensive and traditional industries, showing deepened doubts about the AI sector, but not yet full panic. The main reason came from weaker-than-expected earnings at several highly anticipated companies expected to benefit from AI. For example, Alphabet posted negative cash flow on AI investment, and Amazon disclosed burning tens of billions of dollars in the AI field. Chip giant Intel plunged nearly 29% last Friday on weak guidance, its worst single-day performance in 52 years, dragging down other semiconductor stocks. The market message is clear: simply spending money on artificial intelligence is no longer enough; companies must prove the investment can generate real returns.
Cash Flow and Rates Drive Valuations
When the market relies too heavily on a single investment theme, any sign of weak cash flow can cause turbulence. In contrast, Oracle rose after announcing limits on external financing and a return to positive cash flow. In October, emerging cloud companies relying on borrowing to build data centers were punished, for example CoreWeave lost more than one-third of its market value. Investors are distinguishing whether companies are backing their AI vision with their own funds or with loans. Macro factors also fueled the decline, as the U.S. Federal Reserve kept its benchmark rate unchanged at 3.75% to 4% in late October, but sent a hawkish signal that further hikes are possible due to stubbornly high inflation. The market currently sees an 80% chance of a December hike, with another hike possible next March. The benchmark U.S. 10-year Treasury yield briefly broke above 5% last week before pulling back, becoming a key factor in the tech sell-off, because higher rates raise financing costs and lower the present value of future earnings.
Indexes Diverge as Traditional Stocks Support Market
U.S. third-quarter growth beat expectations, mainly due to AI-related spending, which instead reinforced inflation concerns. Former Federal Reserve member Kevin Warsh announced that next year he will reduce the number of meetings focused on rate decisions to free up more time for broader monetary policy discussions, which the market sees as potentially adding volatility. In addition, the U.S. midterm elections on Tuesday, November 3, have led investors to reduce exposure, as the results could bring regulatory or trade policy risks. Although the decline was concentrated in technology stocks, the Nasdaq Composite fell 5.3% in October, plunging 2.86% last Friday, its second-largest single-day drop this year, and fell about 8% from recent highs, approaching correction territory, defined as a 10% drop from recent highs, but the broader market did not collapse. The S&P 500 fell about 0.9% in October, while the Dow Jones Industrial Average rose about 1.7% in October, showing traditional sectors still supporting the market. The market is assessing whether this is a healthy correction after excessive enthusiasm, or a deeper reassessment of the artificial intelligence boom, with the key being whether companies can prove profitability, the direction of rates, and election results.