JJ Kinahan is Senior Vice President, Head of Retail Expansion and Alternative Investment Products at Cboe Global Markets, Inc. (Cboe).
Key Takeaways:
- Google search revenues fall as competition picks up
- Caterpillar results outpace expectations but still disappoint investors
- At 3.6%, inflation is well above Fed’s 2% target
If it looks like déjà vu all over again – technology stocks fall as investors question artificial intelligence (AI) spending and retreat yet again – then Yogi Berra’s quip fits.
All three major indices backtracked but ended the session above their intraday lows. The tech-heavy Nasdaq Composite dropped 1.38% and the S&P 500 Index gave back 0.30%. The Dow Jones Industrial Average also declined by 0.25%, taking a hit after Caterpillar’s earnings failed to impress investors.
Tech stocks took a hit after Google’s parent, Alphabet, missed Wall Street’s earnings expectations as the company’s AI spending ramped up and its free cash flow dropped $9.07 billion. Investors were probably also spooked by the miss in Google’s search engine revenue, suggesting that AI may be disrupting its bread-and-butter business as competition for search heats up. Shares fell 12.29%, its largest post-earnings drop ever.
Caterpillar’s results outpaced expectations, but apparently not enough to appease investors who apparently expected more robust earnings and forward guidance. We’ve seen this happen before, particularly with AI-centric stocks in recent quarters. On the surface, Caterpillar may not seem like an AI-related stock, but the maker of power-generation equipment has benefited from the AI data center buildout. It might now be a victim of its own success after previous quarters of impressive results.
Caterpillar’s backlog stood at a record $78.1 billion, according to the results, but the company noted "the time required to build up the manufacturing capacity was limiting how quickly it could meet growing demand," which is what likely worried investors.
In economic news, inflation continues to run well above the Federal Reserve’s 2% target, with the annual rate at 3.6%. The personal consumption expenditures (PCE) price index rose 0.5% in September on a seasonally adjusted basis, its largest monthly increase since March. The Commerce Department also reported that real gross domestic product (GDP) rose 3.4% on an annual basis in the third quarter.
The results matter to the Fed, which left interest rates unchanged Wednesday but could raise them in December. The CME FedWatch tool fell to a 77.6% probability of a 25-basis-point hike in December, down from 84.2% Wednesday. A rate increase would generally raise corporate and personal borrowing costs, which could affect the present value of future earnings.
After the bell, Amazon shares fell more than 7% after the company reported its third-quarter sales and profits missed expectations as investors also worried about the performance of its core business.
Intel shares dropped nearly 18% after the chipmaker turned in better-than-expected revenues and earnings overall, but disappointed when sales fell in the firm’s client computing and physical AI group. Intel also offered a disappointing forecast, noting in its earnings press release: “We see the PC slowdown continuing.”
Happy Trading!
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