Biggest rout since Liberation Day

$800 billion was wiped out by the Magnificent Seven overnight, the cohort’s biggest one-day drop since Liberation Day. The crux of the concern from market participants is the extraordinary amounts spent on AI infrastructure and worries around the associated ROI or lack thereof, brought further into focus by Alphabet and Tesla’s earnings reports. Also weighing on markets is another significant repricing of rate expectations, as energy markets fly higher. Oil (USOIL) is up another 12% on the week, as tension and conflict in the Middle East continue to escalate. Speaking of Liberation Day, tariffs are back in the headlines as DJT lays out plans to rebuild that particular wall. With three live rate decisions on the table, along with another set of mega-cap earnings, on top of the forces outlined above, next week is set to be one to remember for traders.  

Mega-caps hit hard

Following the release of their earnings reports in the after-market session on Thursday, Tesla’s (TSLA.US) stock price sank 12% and Alphabet (GOOGL.US) 7%. Google’s parent company revealed that for the first time since listing, it is cash-flow negative, after spending $45 billion in Q2. The slide was contagious; other mega-cap mega-spenders felt the pain too. Amazon down 5%, Meta down 3.5%. The notable exception in an otherwise sea of red was Apple. Its stock is up 11% this month and held firm in the rout as investors recognised its relatively much more measured approach to AI investment.

Following years of spending on the new technology and in particular its related infrastructure, Wall St has now run out of patience in wanting to see the associated payoffs. When the reports and ensuing investor relations’ calls laid bare more enormous outlays but no more clarity on when and where the ROI would come from, the market responding accordingly. Of course the much-changed market environment is punishing reports of this nature differently and more harshly to what it would have before the conflict in the Middle East began. Inflationary worries and higher rates to come mean the urgency is significantly higher and investors are less forgiving.

On top of all that are the increasingly disruptive forces in the Intelligence sector from the Far East. Late last week Chinese startup Moonshot AI released its latest model, Kimi K3. Similar to what we saw with DeepSeek and its “Sputnik moment” last year, the assumptions around moats and 6-9 month advantages that US firms have over their Chinese competitors are being questioned anew. Grey market prices for OpenAi and Anthropic, who both have IPOs in the works, were hit hard as a result.

Next week

Traders’ primary focus on the economic calendar will be three live and significant central bank rate decisions. While a hawkish hold in US is still odds-on, following softer inflation data for June, the chance of a hike by the FOMC has shot up on the back of oil’s 32% rally this month. The market currently has the chances of new chairman Kevin Warsh handing down his debut hike at 34%. It is a similar story in the UK, where the opposing forces of easing inflation and strong employment vs surging energy prices may again lead to a split in the nine-person committee’s voting. Japan saw the same 7-2 voting split last month to hold rates steady. The next hike there is currently priced for December, so guidance in the associated statement and press conference will be scrutinised for confirmation or otherwise.

It will be another massive week in US earnings season. In terms of index weighting, the big ones come in the after-market sessions on Wednesday through Microsoft and Meta, and Thursday through Apple and Amazon. Other prominent names reporting include Visa, Ford and PayPal. Go well out there. 

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