Things are going wrong on Wall Street. Big tech stocks fell in the previous session and futures tied to major US stock indices struggled for clear direction on Friday morning. There is growing nervousness among traders about the amount of money needed to keep Silicon Valley's artificial intelligence alive.
In addition to tech jitters, crude oil prices are rising due to the escalating conflict in the Middle East, while fresh troubles in French government bonds have shaken investor confidence across Europe.
1. Stock futures struggle for direction
US stock futures are trading flat and volatile on Friday. As of 03:01 ET (07:01 GMT), S&P 500 futures were barely moving. Nasdaq 100 futures managed to gain a modest 45 points, or 0.2%, while Dow futures lost 0.3%, falling 149 points.
After this, Thursday's session was brutal, where all the major indices fell heavily. The tech-heavy Nasdaq Composite dropped 2.6%, its worst single-day performance since June.
Deutsche Bank analysts put it clearly in a note to clients, pointing out that all the minor concerns that had built up in recent weeks came to the market at the same time.
For starters, he highlighted the sudden stress in the French bond market. France is dealing with intense political and social friction as well as rising public debt. French government bond yields rose, causing the yield spread between French and German debt to widen at its sharpest single-day pace since the nervous days of March 2020.
While the Deutsche Bank team noted that this was part of an apparent risk-off mood, it did not turn into a complete global bond collapse.
2. Concerns are growing about large-scale AI spending
Instead of dumping everything, investors moved cash directly into the safety of US Treasuries. That buying pushed the benchmark 10-year Treasury yield below 5%. When bond prices climb, yields fall.
What really spooked tech traders was that Meta Platforms launched a new share class to raise cash for its AI roadmap. Like Microsoft and Alphabet, Meta has pledged to spend hundreds of billions of dollars to build large-scale AI infrastructure. Hunt? These tech giants are bearing huge debt burden to fund this.
With interest rates expected to remain high for a longer period of time, companies will issue more shares to keep their AI projects funded. This brings serious dilution risk, which investors hate. Meta shares fell 7% following the news, their biggest one-day decline since July.
Nvidia CEO Jensen Huang added fuel to the fire during an interview with CNBC. He pointed out that there is a complete lack of capital to fund this AI expansion, warning that companies need far more money than is actually going on. Nvidia's shares slipped, and rival Advanced Micro Devices fell right along with it. The composite index tracking semiconductor stocks fell 6.7%.
Yardeni Research's market observers put the main dilemma clearly. He noted that companies that once had massive free cash flow have seen them turn cash negative, forcing them to borrow heavily. Investors are now worried that these rising borrowing costs will not generate the returns needed to justify the bet. More importantly, everyone is now asking the bigger question: Is there enough capital in the world to finance everyone's wild AI plans?
3. Western Digital sinks despite huge earnings
The growing skepticism about AI was clearly visible in Western digital. The data storage and memory chip maker posted stellar quarterly figures, but its shares still fell more than 6% in after-hours trading.
High-end storage and memory chips are important parts of AI data centers, which has created massive demand and tight supply. Western Digital took advantage of this, seeing its average selling price per terabyte increase 28% during the first quarter of its fiscal year.
Revenue stood at $4.38 billion while profit stood at $1.78 billion. Both numbers handily beat Wall Street forecasts.
Still, the stock fell. Western Digital is already up more than 88% this year, and traders used the strong earnings report as an opportunity to lock in profits and exit AI-related trades.
4. Oil prices rise due to Middle East fears
Adding to general market tensions, crude oil prices climbed once again as fighting in the Middle East threatened to spread.
Reports this week revealed that the US and Israel may be planning new military strikes against Iranian targets following the upcoming US midterm elections. The Wall Street Journal reported that Tehran has already promised a strong response, including possible attacks on key economic and civilian infrastructure.
At the same time, Houthi rebels in Yemen continued drone and missile attacks on Saudi Arabia. On Thursday, state energy giant Saudi Aramco ordered the evacuation of its corporate headquarters in Dhahran, near the border with Bahrain.
Traders are worried that any wider conflict would disrupt crude oil shipments from the Persian Gulf. By 03:40 ET, global benchmark Brent crude was trading 0.8% up at $114.01 a barrel, off Thursday's five-month high of $113.17.
5. SK Hynix Shelves Solidigm US listing
In Asia, shares of South Korean chip giant SK Hynix fell after the company shelved the US initial public offering of its Solidigm unit, pointing to poor market sentiment and shareholder value concerns.
Solidigm, which makes NAND flash storage and solid-state drives, was looking for new funding to expand its factory lines and keep up with rival chip makers.
SK Hynix said in a regulatory filing that after reviewing the overall capital market conditions, it decided to pause both pre-IPO fundraising and a full public listing. Earlier reports suggested Solidigm was trying to pull in about 5 trillion won ($3.8 billion) before going public.
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Key Takeaways for Tech Stock and Energy Traders
- AI funding fatigue is real:Massive spending plans and stock dilution concerns are forcing traders to question whether the mega-cap tech can justify its skyrocketing multiples.
- Good earning by selling:Western Digital proved that even exceeding revenue and profit targets is not enough when the broader sector is in a risk-off phase.
- Energy remains a big wild card:With Brent crude crossing $114 a barrel, inflation risks remaining stagnant and borrowing costs uncomfortably high for capital-hungry tech companies.
- IPO windows are closing:SK Hynix has put the brakes on Solidigm's multi-billion-dollar debut, signaling that risk appetite for hardware listings has waned considerably.