As AI rally wobbles, stock market's spotlight turns to earnings

Investor confidence is being tested as a stumble in the leading AI trade occurs, with Wall Street focusing on quarterly results from key players including Meta Platforms. AI-linked stocks, which have been central to the four-year bull market, have struggled in recent days. Semiconductor companies and tech hardware firms, such as Dell Technologies, have experienced sharp declines. Meta, a major spender on AI data centers, is set to report quarterly results along with semiconductor firms Lam Research and Texas Instruments.

The current narrative in the market appears jittery, with uncertainty surrounding the current state of AI. Worries have rippled through markets regarding the financing of the AI build-out boom, which has lifted profits for many companies and boosted economic growth. Investors are closely watching developments tied to CoreWeave, an AI cloud company with around $50 billion in debt. Shares of CoreWeave have plummeted this week.

Other signs of caution include strategists at Deutsche Bank and RBC Capital Markets reducing their recommendations for the tech sector. On October 9, Deutsche Bank strategists stated that the rotation into tech had run too far and the risk-reward was no longer favorable in the near term.

Despite the decline in heavyweight tech and AI stocks, the S&P 500 has only dropped about 1% from its record high set this month. Other sectors, which lagged behind the technology surge, are now picking up the slack. Analysts note that this is an on-off switch type of market, where when AI is working, it dominates the market attention, overshadowing other sectors.

Meta, one of the AI hyperscalers, is set to lead the reporting season, with investors eagerly awaiting signs that the company can demonstrate returns on its AI investments.