Investors are growing impatient with the spending habits of companies in the AI circle. On Wednesday after the closing bell, Meta reported its highest quarterly revenue on record, but its heavy spending to stay ahead in the AI race out led to the company falling short of net income expectations and its free cash flow went into negative territory for the first time since it became a public company. Their plan for 2027 is “to continue investing aggressively”.

With hundreds of billions of dollars already spent and hundreds of billions more locked in future spending commitments, investors are starting to question if consumer demand will reach profits proportionate to the level of risk, capital, and time committed.

Meta’s after-hours stock price initially jumped after the earnings release. But enthusiasm for record earnings faded into discontent on spending pushing stock price lower by Thursday’s open. The inertia from the Meta decline ignited a broader sell-off across AI trade and Meta ended the day with a 7% loss. The C-fund, heavily exposed to the AI trade, fell 1.2% for the day.

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Next week Alphabet and Microsoft report their earnings on Wednesday followed by Amazon on Thursday.

As we’ll see below, bonds were a safe haven for risk averse investors. But there was also rotation into other sectors within the S&P 500. RSP, an equal-weight ETF of the S&P 500, gained 0.7% on Thursday. This is more evidence this was an AI sell-off, not of equities all together.

The S-fund was not spared from the selling. Twenty-two percent of DWCPF stocks are within the tech sector including some of its most heavily weighted constituents like SpaceX and Snowflake. The S-fund lost 0.8% on Thursday.

ACWX lagged the U.S. markets. The AI exit stretched across global markets particularly hitting the semiconductor market. Attacks in Saudia Arabia also have global markets nervous of re-escalation of conflict in the Iran war.

Bond prices spiked today as they were the target for many investors seeking to reduce risk in the face of a potential deeper equity sell-off. The 10-year Treasury yield felt its largest one-day drop since March 2023 pushing it back below 5%. The F-fund price was up 0.8% on Thursday.

Thanks so much for reading!  We'll see you back here on Monday.

Thomas Crowley

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