US futures are taking quite a beating today as what looked to be a promising rebound in Wall Street yesterday is already threatening to unravel. S&P 500 futures are down 1% with Nasdaq futures down 1.7% as tech shares are bearing the brunt of the selling.
Tensions in the Middle East are once again pushing up oil prices, so that is arguably keeping investors on edge. But then, you have Treasury yields falling as 10-year yields are down to 5.08% today. Ordinarily, that should offer some relief to tech shares amid their lofty valuations. But not today, it seems.
In any case, I would argue that the bigger problem lies with earnings and whether the AI rally can continue to live up to the enormous expectations already priced in.
Now, Meta’s earnings did at least offer some encouragement with revenue jumping 26% to $64.6 billion and its shares holding up relatively well. Shares are trading about 0.8% higher in after-hours trading but that optimism isn’t translating into broader confidence across the tech sector.
Just look at Lam Research. The semiconductor equipment maker reported record quarterly revenue of around $8.2 billion, beating estimates, yet its shares have tumbled by over 8% in after-hours trading. Even a strong quarter wasn’t enough as investors chose to focus on the weaker-than-expected forward earnings forecast instead.
Besides that, there’s also Tesla getting into trouble after its own earnings release with shares down roughly 5% in after-hours trading. Meanwhile, smaller semiconductor firm NVE Corporation is seeing its shares sink by over 22% after reporting an 8% decline in quarterly revenue.
These are rather different earnings stories but collectively, they paint a picture of a market that is becoming much less forgiving. Much, much less.
And I think the bond market is also telling us something here. With Treasury yields falling even as oil prices rise, could investors be starting to worry more about US economic growth than inflation?
You might think that if yields are easing, it would help provide some comfort for stocks. However, that sort of relationship is not exactly straighforward. If yields are falling because investors are becoming nervous about the economic outlook, then the implications for corporate earnings and the stock market outlook are hardly encouraging as well.
For the AI trade, the latest market mood simply reinforces the narrative that investor expectations are becoming much harder to justify especially when the economy starts losing momentum. In particular, companies with heavy borrowing finance their AI ambitions are arguably the ones that will be hit the hardest.
Now, I wouldn’t call this the end of the AI rally just yet. But when record earnings and falling Treasury yields can’t provide much support to equities, it may be a case that Wall Street is finally starting to question whether the bar has been set too high. And waking up to that very reality could end up being extremely painful.
This article was written by Justin Low at investinglive.com.