Tech Sell-Off Spreads Beyond Chips, Brent Crude Tops $110

The market has seen a sell-off in technology, which has now spread to software and cybersecurity sectors, following earlier pressure on chip stocks. The NASDAQ composite is down 2.37%, while the S&P 500 has fallen over 1%. The overall technology sector is down 3% for the day and 7.7% for the week.

Brent crude oil reached $110 a barrel earlier today, contributing to broader market concerns. Meanwhile, the VIX volatility index is up about four points to 20.41, a level that typically garners attention.

This negative market pattern has been identified by some as a classic bull trap. Yahoo Finance's Jared Blicker observed the expanding sell-off, stating, "We are now seeing a sell-off also in software and cyber security."

Tesla's new Roadster is viewed by analysts as a symbolic link between Tesla and SpaceX, highlighting the technological synergy between the two companies. RBC Capital Markets' lead equity analyst, Tom Nion, described the Roadster as a showcase of Tesla's engineering prowess, noting it reminds people that Tesla is a "truly a special company."

While production for the Roadster is not expected until 2028, the vehicle's unveiling emphasizes the potential integration and shared value between Tesla and SpaceX. Nion commented, "I do think it highlights the value and the integration between them and SpaceX, which I think ultimately is the real story here."

The broader narrative surrounding Tesla extends beyond being solely an EV company, positioning it more as a technology firm. The event for the Roadster is seen as an opportunity for Tesla to demonstrate its technological advantage, such as its FSD software, and to hint at future collaborations like orbital data centers.

The discussion suggests that the true long-term value of this combination lies in areas like AI and orbital data centers, with Terraab chip technology identified as a critical future component.

The concept of orbital data centers for AI infrastructure is considered conceptual and theoretical for now, with little expectation of specific metrics within the next 12 months. Tom Nion, an analyst, expressed his perspective: "I don't know if you'll get much metrics in the next 12 months. I think this is a more longer term thing... I do think it's somewhat conceptual and theoretical."

Despite the theoretical nature, there is enthusiasm for orbital data centers, and technologically, their feasibility is considered high. The value of this development is reportedly being factored into AI compute infrastructure, although specific short-term data points for investors to track are not readily available, making it a waiting game for now.

Pre-orders for Apple's Duo device have resulted in shipping dates slipping into 2027, indicating both significant customer excitement and initial supply constraints from Apple. Carolina Milani, an analyst, noted, "I think what it says is two things. One is that clearly there's a lot of excitement around the Duo but also at the same time constraint from Apple part. They made it very clear that they were going to be constrained at the beginning."

Customers experienced delays as early as the first 10 minutes of pre-orders, with shipping dates pushed to November and December for some. This suggests a strong initial demand that Apple had anticipated and warned about regarding supply.

The adoption of the Duo is also expected to impact sales of the Pro Max line, as some consumers may be waiting to compare the devices in-store before making a purchase. Milani suggested that some people are holding off on Pro Max pre-orders, opting instead to try the Duo in stores over the coming weeks.

Despite potential shifts in demand for existing models, the analyst anticipates that the Duo's higher price point will likely lead to an overall increase in Apple's Average Selling Price (ASP).

Apple's success and resilience in the AI landscape stem from its strategic positioning of iOS, macOS, and iPadOS as the primary platforms for AI delivery, rather than solely relying on advances in Siri. Carolina Milani explained, "At the end of the day, Apple is still in a hardware services business. And so if it can demonstrate that from an ecosystem perspective, you want to develop for Apple... then I think that Apple will be... certainly breathe a little bit more easily."

The company's focus is on demonstrating compelling value for developers to build AI services that run within the Apple ecosystem. This strategy leverages Apple's strength in attracting a lucrative consumer and increasingly, a business market base.

While previous criticism regarding Siri's development lag existed, Apple's broader ecosystem strategy for AI delivery is seen as more critical. By making its operating systems the go-to platforms for AI services, Apple aims to ensure its continued relevance and profitability in the evolving AI market.

Following a speech by Fed Chair Kevin Worsh, the market saw a surge in bets against a rate hike, which surprised analyst Jennifer Shamberger. Shamberger stated, "I don't feel that Worsh tipped his hand. He didn't really push back or endorse signals that his colleagues have given that they're not in a rush to raise rates again."

Worsh maintained his stance of not prejudging meetings and indicated that the median projection of the FOMC still anticipates one more rate hike this year. Shamberger cautioned against assuming the upcoming meeting is not 'live,' despite the market's interpretation.

Worsh also commented on AI, calling it a "positive demand shock" that could lead to increased aggregate demand. He expressed expectations for positive supply shock results over the medium term and acknowledged that AI's impact on the labor market in the next 18 to 24 months could be "a little bit bumpy," though he believes it will be positive for productivity and wealth longer term.

A proposal suggests reducing the number of Federal Reserve meetings from eight to six per year to better align with data cycles. Jennifer Shamberger elaborated on the concept: "essentially this is looking at recasting the calendar based around data cycles and ensuring that the Fed has a full data set when it goes into its meeting to make a fully informed decision on rates."

The current schedule often results in the Fed making decisions without having critical data, such as the preferred PCE inflation data, in hand. For instance, the Fed's October 28th meeting will precede the release of this key inflation gauge the following day.

By adjusting the calendar to ensure all relevant data, including two full employment reports and the complete inflation set, are available, the Fed could potentially make more informed policy decisions. This idea, floated by Worsh in July and supported by figures like Matt Luzetti of Deutsche Bank, aims to improve the precision of rate decisions.

Rick Worster, CEO and President of Charles Schwab, emphasized that AI agents should only be used for trading on behalf of an investor if they are provided with clear rules and a defined methodology. Worster stated, "I think an AI agent should only trade on your behalf if you give them the rules of the road. You work with them to build a process... But just handing the keys over, I think that to me that's a leap too far. It is risky."

He warned against the dangers of entirely autonomous trading without human oversight, likening it to "handing the keys over." Instead, he advocates for a collaborative approach where investors define their trading process and oversee the AI's actions.

Worster also expressed skepticism about AI providing long-term outperformance in trading, citing the historical presence of quantitative strategies and the tendency for such advantages to be arbitraged away over time. He believes that as more entities utilize similar AI-driven approaches, the opportunities for significant outperformance will diminish.

Furthermore, Worster highlighted the need for human financial advisors to 'up their game,' as clients will still seek human interaction and guidance despite integrating AI tools into their financial management.

Rick Worster clarified a common misconception about intergenerational wealth transfer, explaining that it typically occurs between older cohorts rather than directly from older generations to young adults. He stated, "This is one of the most misunderstood things in the industry. The money is going to go from 95 year olds to 65 year olds. And the 65 year olds are going to keep it for another 25 30 years."

This means that wealth is generally transferred from individuals aged 95 to those around 65 years old. The 65-year-old generation is then expected to retain this wealth for an additional 25 to 30 years before it might be passed on further.

The idea that a significant amount of money will immediately flow to 24-year-olds is, according to Worster, incorrect. This observation challenges the popular narrative of rapid wealth transfer directly to younger generations.

Nvidia's advanced technology and pricing power allow it to significantly control the AI marketplace, influencing the costs of compute power for infrastructure providers. Brian Stutland explained, "Nvidia kind of actually controls the marketplace in the sense that the the better their technology becomes based on the profit marginability of their business, they can raise or lower cost to that compute power."

Companies like CoreWeave, which build out AI infrastructure, are dependent on purchasing chips from Nvidia. Their profitability is therefore closely tied to Nvidia's technological advancements and pricing strategies, as they must pass on these costs.

Investors have concerns regarding CoreWeave's long-term profitability, particularly the sustainability of passing on chip costs as Nvidia continues to innovate with better and faster chips. The question remains how long CoreWeave can maintain its margins, especially if compute power costs drop to a level where Large Language Models (LLMs) can afford it more easily, impacting the infrastructure provider's profitability.

A discrepancy exists between the high costs of building out AI infrastructure and the profit margins currently promised by revenue commitments from LLM providers, highlighting the financial complexities of the rapidly evolving AI sector.

The broader market is experiencing a rotation away from tech sectors as the sell-off initiated by semiconductors has now extended to software. The S&P 500 is down 1% for the day and 2% for the week, with the NASDAQ Composite down 4.5% over the last few days.

Jared Rippery of Yahoo Finance noted that while the overall market held up, the decline is concentrated in technology. He stated, "Semiconductors began the selloff and now software has joined it today."

In contrast, defensive sectors are performing well, with consumer staples and energy both up 5%, and healthcare and materials also showing gains. This rotation indicates investor caution, suggesting a move towards more stable assets. Rippery also identified a "failed breakout" or "bull trap" in tech, S&P 500, NASDAQ, and Bitcoin, where markets quickly declined after overcoming previous highs.

The chip index, known as the "Socks," is currently down 24% from its high, approaching critical support levels. Analyst Jared Rippery indicated that the index could test levels around 10,500 or even 10,000.

DRAM has recently entered a new bear market, further signaling weakness in the semiconductor space. Rippery noted that DRAM is "down substantially" and is now testing mid-summer lows again.

This situation suggests that both the broader chip index and specific memory components are at significant technical junctures, with potential for further downside if these support levels fail to hold.

Despite robust earnings growth expectations of over 30% year-over-year for growth stocks, particularly in tech, the market is discounting future earnings, leading to valuation compression. Sebastian Paige observed that these high expectations are at an "all-time high."

However, the market's skepticism is reflected in the declining price-to-earnings (P/E) ratio for the 'Mag 7' group of hyperscalers. The P/E ratio for this segment has dropped from 35 about a year ago to 25, indicating that the market believes these high growth rates may not be sustainable long-term.

Despite this market sentiment, Paige's firm maintains an overweight position on large-cap growth stocks, suggesting they remain optimistic about earnings growth for the next 6 to 12 months. They anticipate continued strong earnings and even positive surprises in their associated portfolios.

The market is underestimating the long-term inflation impact stemming from rising energy prices, specifically oil shocks, due to lagged effects. Sebastian Paige highlighted historical data, stating, "If you study the data historically, the average core inflation for the 12 months following a 40% oil shock is, are you ready for this? 4.9%."

He explained that while the economy's sensitivity to oil shocks has changed since the 1970s, the ripple effect of higher diesel costs, impacting transportation and subsequently consumer prices, creates persistent inflationary pressure. The market's current pricing for 12-month inflation, between 2.5% and 2.7%, is considered too low by his firm, especially given that actual current inflation is running at approximately 3.7%.

This underestimation means portfolios may not be adequately protected against future inflation. Paige noted his firm is implementing strategies, including investing in energy stocks, to safeguard against these anticipated inflationary pressures, particularly as gasoline prices remain solidly above $4 a gallon.

The iconic Radio Shack brand is being revived under the ownership of Unicomr Group, a company that was once Radio Shack's largest franchise operator. Kevin Hammond, representing the new Radio Shack, explained that Unicomr Group, based out of El Salvador, acquired the intellectual property and brand assets for the US, Canada, and approximately 70 other countries in 2023.

While not operating the thousands of corporate stores of its past, Radio Shack's US presence now relies on authorized dealers, many of whom have been in business for decades in small towns, serving as local technology destinations. Additionally, the brand maintains an online presence at radioshack.com, offering about 400 branded products, and sells through major e-commerce sites like Amazon and Best Buy.

The revived brand is focusing on a 'Retrotech' strategy, which blends vintage design with modern features. This approach leverages nostalgia while incorporating contemporary functionalities like Bluetooth into products such as retro boom boxes, aiming to appeal to both older customers and younger generations interested in classic aesthetics with modern convenience.

The upcoming week of October 19th is set to be busy with significant corporate earnings reports and key housing data. Netflix and SpaceX are scheduled to report their third-quarter results on Tuesday, October 22nd. Analysts anticipate Netflix to report $12.9 billion in third-quarter revenue, with investors closely watching subscriber growth and future programming. For SpaceX, launch cadence and Starlink subscriber counts will be key metrics.

On Wednesday, October 23rd, Meta and Tesla will release their quarterly earnings. Meta is projected to show increased revenue, and commentators will be listening for any updates on Meta's news amid its growing AI investments. Tesla is expected to post year-over-year declines in earnings, but investors will be keen for comments on the new Roadster vehicle during the earnings call.

Additionally, a substantial batch of housing data will be released throughout the week, including September pending home sales, which economists expect to remain flat on a month-over-month basis.