JJ Kinahan is Senior Vice President, Head of Retail Expansion and Alternative Investment Products at Cboe Global Markets, Inc. (Cboe).
Key Takeaways:
- Investors rotate into blue chip stocks
- Meta, Nvidia shares take a hit
- Moderna, Merck shares fall after preliminary vaccine results leak
The sell-off happened quickly today as investors fled technology stocks for more defensive sectors such as classic blue-chip stocks.
The worries about returns from the billion-dollar investments into AI-centric stocks took center stage again. There were also a handful of other reasons why investors took profits from artificial intelligence (AI) and semiconductor stocks to finance purchases in traditional conglomerates and consumer staples. As stocks that have historically provided earnings and dividends, for many they probably offer a little more reliability in their portfolios.
The tech sell-off likely started with disappointing news and guidance from Meta late Wednesday. Meta reported it spent $2.12 billion in cash for the third quarter and narrowed its full-year capital expenditures to $135 billion to $145 billion.
It also said it is launching a new class C non-voting stock to help cover those AI-building costs, prompting Wall Street analysts to surmise the company is forced to dilute shares to avoid taking on credit-downgrading debt, according to reports.
Nvidia Chief Executive Jensen Huang defended AI investments, noting on CNBC that demand is “off the charts.” But he said AI growth is at a “bottleneck” because “the demand for capital is much greater than the availability of capital.” He implied that financial institutions were moving too slowly, according to reports.
Meta shares ended the session down nearly 7% and Nvidia lost 4.4%.
The price of WTI Crude Oil climbed but stayed below $100 per barrel again amid heightened fighting in the Middle East and a New York Times report that specific plans of military action against Iran were in the works to go live after the midterm elections. Brent crude was up nearly 4% to $113 per barrel. Bond yields also fell, with the 10-year Treasury yield falling below 5% as demand for bonds grew.
By the time the bell rang, the Nasdaq Composite fell 2.6%, near session lows. The S&P 500 Index dropped 1.2% and the Dow Jones Industrial Average was flat, again.
Though this might be called a “bad day” in the markets, in the grand scheme of things, it’s not the worst. However, AI spending is likely to be the story for some time.
Consider the Cboe Volatility Index® (VIX® Index) movement today. The leading measure of expected market volatility moved markedly higher during the session, rising just above 20, considered a warning sign of probable volatility. But it settled at 18.99, backing toward stability.
On the defensive side, Procter & Gamble was among the biggest movers, adding 5.6%, an eight-month high, after outpacing Wall Street’s expectations. Coca-Cola shares were higher by 2.9%, PepsiCo up by 3.0% and Kimberly-Clark gained 5.3%.
Elsewhere, shares of Moderna and Merck retreated after leaked results of the companies’ experimental personalized cancer vaccine to treat melanoma disappointed investors. In August, shares of the two pharmaceutical giants leaped after they reported their Phase 3 trials of a combination of Merck’s Keytruda and Moderna’s mRNA cancer drug met its goals.
The leaked report today, which the companies planned to release at this weekend’s European Society of Medical Oncology Congress in Madrid, said the combination was 42% effective at reducing the risk of melanoma recurrence or death, a breakthrough, but not nearly what investors were expecting. This might be considered a classic buy-the-rumor, sell-the-news scenario. Some anxious investors bought shares of either company, thinking the vaccine might be the “miracle” cure for cancer. The leak, which both companies confirmed, prompted the sell-off, with Moderna giving back some 25% and Merck backtracking by about 2% as many investors appeared to take profits. Before today, Merck‘s share price had climbed roughly 10% while Moderna’s was up 188%.
Happy Trading!
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