High Inflation & AI Valuation Risks: Key Test for U.S. Earnings Season

Last week, US September inflation data exceeded expectations across the board. Driven by a sharp surge in energy prices, both headline CPI and PPI came in higher than market forecasts, fueling expectations that the Federal Reserve will maintain a hawkish stance or even raise interest rates. Concerns began to emerge over the debt burden and rising financing costs in the AI sector, triggering a noticeable pullback in tech stocks. Meanwhile, the US Q3 earnings season is officially underway, serving as a critical test of whether high valuations can be sustained. In commodities, prices were predominantly driven by geopolitical developments, with crude oil strengthening while precious metals remained under pressure.

Following last week’s sell-off in U.S. tech stocks, markets saw a notable rebound on Monday, driven by bargain hunting after the steep decline as well as rating upgrades from several institutions. However, market concerns regarding the profitability and debt risks of the AI sector have not fully dissipated. The market's focus will now shift to upcoming earnings releases from tech giants to gauge whether the AI trade is experiencing a temporary cooling or facing a structural turning point. This week, tech giants including SpaceX, Tesla, and Meta are set to report their financial results. Because the market has set an exceptionally high bar for upside earnings surprises among AI companies, the defining feature of this earnings season is that even solid performance numbers may not guarantee a stock price rise. For example, major U.S. banks such as Goldman Sachs and Citigroup, which were among the first to report, saw their stock prices fall despite both revenue and net profit topping expectations. Therefore, management's forward guidance, earnings quality, and the sustainability of corporate growth will be the key determinants of whether stock price momentum can be sustained.

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Driven primarily by geopolitical supply risks, the crude oil market posted broad gains last week. Brent crude closed near $110 per barrel as market anxieties escalated over Houthi attacks on Saudi oil facilities and frequent incidents involving tankers in the Strait of Hormuz, both of which pushed up the geopolitical risk premium. Additionally, a hurricane in the U.S. Gulf of Mexico temporarily shut down approximately 72% of crude production, providing further supply-side support for crude oil. In the short term, crude oil's direction will hinge on variables such as whether actual vessel traffic through the Strait of Hormuz can resume, the progress of U.S.-Iran negotiations, and petroleum reserve quotas. Until supply risks ease substantially, downside room for oil prices remains limited, while the sustainability of any upward momentum will depend on demand-side factors and macroeconomic uncertainties.