Article published at 9:30 a.m. CT
JJ Kinahan is Senior Vice President, Head of Retail Expansion and Alternative Investment Products at Cboe Global Markets, Inc. (Cboe).
Key Takeaways:
- Alphabet and Tesla set the AI spending stage
- Crude oil prices on the upside as Middle East war finds new targets
- Crude oil’s next resistance level is at $94 a barrel
The markets were under pressure in early trading as investor fears grow over heavy spending on artificial intelligence investments coupled with the heightening escalations in the Middle East.
Alphabet and Tesla reported earnings late yesterday that outpaced Wall Street’s revenue expectations, but rattled investors as they both reported negative cash flows and ratcheted up their AI spending intentions. That’s setting the tone for AI spending across the board for mega-cap technology companies.
Also unnerving investors is the rapid overnight rise in crude oil prices as the crisis in the Middle East heats up. While the U.S. and Iran traded strikes for the 12th straight day, Iran’s allies in Yemen were striking tankers in the Red Sea. The Houthis’ strike could potentially create a second chokehold for global shipping, according to the New York Times.
In early trading, WTI Crude Oil prices were higher by 5.30%, tipping into the $91-per-barrel range – about where they were eight weeks ago and hitting a one-month high. Keep an eye on the $94-per-barrel range, which is the next major area of resistance.
All major indices were trading to the downside with the S&P 500 Index falling 1%, the Nasdaq Composite giving up 1.8% and the Dow Jones Industrial Average dropping 1%. There was a whole lot of nothing going on in the markets yesterday as investors waited on those earnings results. When they settled, the S&P and the Dow barely moved off the flatline and the Nasdaq gave up 0.57%.
Not surprisingly the Cboe Volatility Index® (the VIX® Index) is up today, too, at 18.79. As we’ve noted before, with a warning level usually around 20 and above, we’re still not too near a cautionary level. Watch the VIX® Index for more insight.
The stocks on the move today include Alphabet, which is dropping 5.3% after releasing earnings yesterday that beat Wall Street’s earnings and revenue expectations, thanks to strength in its cloud and search businesses. What is spooking investors is the $15 billion the parent of Google and YouTube added to its capital expenditures plan, boosting it to a sky-high range of $195 billion to $205 billion, up from previous estimate of $180 to $195 billion.
In the second quarter alone, capex spending swelled by 100% to $44.9 billion as the enterprise works to step up its investments in artificial intelligence as demand increases. It expects capex to increase “significantly” in 2027, the company said. Shares declined in line with implied moves ahead of the results.
On a conference call with analysts, Chief Financial Officer Anat Ashkenazi said the company is still battling with a “supply-constrained environment. I think we’ve said this now for multiple quarters in a row, and we are seeing very strong demand both from external cloud customers as well as across the business.”
Tesla’s capex isn’t nearly as high as Alphabet’s – up 142% in the second quarter to $5.79 billion – but the space and auto giant expects it to grow above $25 billion. “This is a massive capex year,” Elon Musk told investors on a conference call after the earnings were announced. “I’m confident that all the things that we’re investing in will yield incredible returns – really, maybe the best capex return that we’ve ever seen.” Shares were falling 7.8%, also aligned with implied moves ahead of the results.
IBM shares were off 2.32%, lower than its implied moves, after the firm reported results that were consistent with its July 14 warning and lowered its forecast for growth from 5% to 4%. It did not offer AI capex guidance.
On the conference call, CEO Arvind Krishna said, “Our AI strategy is the right one for IBM and aligns to what we are known for – hybrid sovereignty and trust. With the portfolio, we have opportunities ahead. It comes down to execution. That is where we fell short in the second quarter.”
There are bright spots in trading today. Gold prices are climbing 2% higher today as investors look for a safe haven. Also on the upside are shares of ServiceNow, rising 5.6% after the cloud-based platform reported its products passed the $1 billion milestone and it raised guidance.
Honeywell shares added 5% in early trading after the industrial giant’s second-quarter results outpaced Wall Street’s expectations and it raised guidance on both profits and revenue. The quarter “marked a historic milestone for Honeywell Technologies” with the separation of Honeywell Aerospace, Chief Executive Officer Vimal Kapur said on the conference call. This, he said, is the beginning of “a new era as a leading pure-play automation company.”
Happy trading!
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