Wall Street Faces Challenges Amid AI Funding Concerns
Last week, Wall Street had a tough time as new worries about financing the artificial intelligence (AI) boom overshadowed solid earnings reports. Initially, AI-related stocks gained traction, but the momentum hit a snag on Thursday when Meta Platforms revealed its first negative free cash flow since going public in 2012. This led to a wider sell-off in less aggressive market segments on Friday, pushing the Dow Jones Industrial Average down by over 1% alongside rising oil prices amid renewed tensions regarding U.S. actions against Iran. Interestingly, the Nasdaq managed only a slight loss, with investors turning their attention back to undervalued chip companies and cybersecurity stocks. The S&P 500 also saw minor declines. Looking at the week overall, the Dow emerged as the standout performer with a gain of 0.4%, while the S&P 500 slipped by 0.5%, and the Nasdaq fell by 0.7%. Let’s explore three key factors that influenced last week’s market trends.
AI Funding Fears Deepen
The volatility surrounding the AI sector persisted as investors grappled with strong demand against rising concerns over financing the necessary infrastructure. AI stocks had a brief rally earlier in the week, propelled by impressive revenue numbers from SpaceX. However, Thursday turned sour as cash flow issues emerged. Although Meta reported strong earnings, questions arose when the company highlighted potential financing needs amounting to hundreds of billions of dollars for future projects. CoreWeave, a company that has attracted scrutiny due to its heavy reliance on debt for AI development, dropped 10% on Thursday and saw its weekly decline exceed 10%. Nvidia’s CEO, Jensen Huang, openly acknowledged the growing funding needs, pointing out that the demand for capital far exceeds its current availability. The central issue, it seems, isn’t the appetite for AI but rather whether companies can find financing as borrowing costs climb. Nvidia itself saw a decline of about 1.5% last week.
In a bid to take advantage of Thursday’s downturn, we purchased our first 10 shares of GE Vernova in five weeks, maintaining our optimistic outlook on long-term power demands. However, we also decided to limit our broader investment in AI. “The collapse of the data center requires us to circle the wagons,” Jim Cramer observed. “We need to be selective and stay focused on our strongest positions.” Consequently, we exited our holdings in Broadcom, securing an average gain of about 128%, and also trimmed our position in CrowdStrike after realizing an impressive 187% gain, not due to underlying worries, but simply to rebalance our portfolio. Both CrowdStrike and Palo Alto Networks performed well, increasing over 11% as security vulnerabilities in the PHP programming language triggered heightened global security measures. CrowdStrike’s CEO, George Kurtz, noted that AI-driven cyberattacks have doubled monthly since July.
Meta’s Turbulent Week
Meta announced strong third-quarter results, yet fears over its negative cash flow and its funding needs dampened enthusiasm for its promising Muse AI project. Following a rally in after-hours trading on Wednesday night, Thursday saw a painful 7% drop in Meta’s stock price. Initially, a subdued outlook on capital expenditures seemed positive, but a regulatory filing soon transformed investors’ expectations. Meta warned that its long-term strategies could demand raising “hundreds of billions of dollars” starting as early as fall 2026. The company also revealed plans to introduce a new class of non-voting stock to facilitate financing without diluting CEO Mark Zuckerberg’s control. Essentially, it would operate like a two-for-one stock split—holders would receive one Class C share for each Class A share they have. While Meta’s core digital advertising work and early traction for Muse are encouraging, we prefer to have more clarity about funding and monetization of these investments. We kept our hold-equivalent rating at 2 and maintained an $800 price target for Meta stock, which ultimately lost over 9% during the week.
Positive Developments in Defensive Portfolio Holdings
The shift away from AI stocks provided a boost to several defensive investments, underscoring the importance of diversification. Kimberly-Clark climbed by 4.3% as investors flocked to consumer staples for safety. Home Depot rose by 3.3%, buoyed by the 10-year Treasury yield dipping below 5%, which might revitalize housing and home improvement spending. Johnson & Johnson rebounded, increasing by 3.2% and recouping all losses from its earnings-related decline as investors moved back into healthcare. Additionally, Apple and Qnity Electronics saw promising developments. Apple’s new foldable iPhone Duo launched to strong demand, with delivery times exceeding three months. Although supply shortages contribute to these wait times, this suggests the device could spark another growth phase for the company. Apple’s stock rose about 1.2% over the week.
Moreover, Apple expanded its collaboration with Qnity, which will provide enhanced components for the new camera system of the iPhone 18 Pro. This development is indeed encouraging, yet our investment narrative remains focused on Qnity’s burgeoning data center sector. Despite this, Qnity shares fell by more than 4.5% last week, impacted by challenges in the data center market, although this drop was significantly less than the decline experienced by GE Vernova, which plunged over 11%.
