AI Earnings Put to the Test as Oil Keeps the Pressure On

The tech sector has had the wobbles again of late, with higher funding costs for the AI buildout courtesy of rising yields and increased competition from China (CXMT, specifically) raising anxiety levels regarding the AI trade. But this week’s US Q3 earnings results may go some way to telling us if the recent selling pressure has been overdone or if it was justified. Things have gotten off to a pretty good start on that front, with investors liking what they heard from SpaceX both in terms of the bottom line and potential plans for a merger with Tesla. The revenue and EPS beats, and news of a committee to discuss a possible SpaceX-Tesla merger, was well received by the market.

Next up, Tesla and Meta’s quarterly results will be under the microscope (both due to report Wednesday, US time). For Tesla, much of the valuation of the company is driven by technology which is still waiting in the pipeline (e.g. Robo Taxi, Full Self-Driving), so traders will be trying to connect the dots between when technological advancements such as these will start materially benefitting revenue. There will also be scrutiny over whether the free cash flow of Musk’s automaker can continue to pay for the AI buildout moving forward.

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Turning to Meta, we know the AI Capex number will be huge, but the key question is how much the vast expenditure is eating into profitability. Operating margin compression will be in the spotlight too for the hyperscaler. Essentially, Meta’s earnings results will be viewed through the lens of whether the top-line revenue figure can justify the soaring Capex budget. The results from Tesla and Meta could either remind markets of Capex anxiety or revive enthusiasm for the AI trade, depending on how the numbers stack up and how rosy or otherwise the forward guidance appears.

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Elsewhere, bond yields are cooler than one week ago, albeit still at elevated levels. The US 10-year Treasury yield sits at around 5.11% despite the US CPI and PPI figures last week which produced upside beats. So why is the yield now trading 10 basis points lower than a week ago, despite the hotter inflation figures? In part because Fed officials don’t appear to have been prepping the market for an October rate hike (with the market odds sitting at about 20% for a rate hike next week), and in part because the move to multi-decade high bond yields has been attracting buyers, which in itself then drives yields lower given the inverse relationship between bond yields and bond prices. But despite the pullback in bond yields, it’s too early to say that yields have peaked given the variability and volatility which still exists in oil prices, which I would argue are the single biggest factor in yield rises.