Fidelity's Timmer: Higher Rates Could Hurt Stocks Without Matching Earnings Growth
Fidelity's Timmer says higher yields are a risk for stocks unless earnings keep pace. He sees no bubble if margins and spreads hold.
Fears over AI spending from Amazon and Alphabet drive stocks, yields and gold lower, with Nasdaq futures off 1.8% ahead of European trading.
Markets seem to be getting an early Halloween scare as the trading week draws to a close. Equities and Treasury yields are sliding in tandem, while gold is also failing to find buyers. That is a decidedly unsettling mix.
What, then, is behind this market fright?
Amazon's overnight earnings have deepened the gloom, with its hefty AI investment outlay eclipsing strong cloud performance. The company's shares fell 7% after the bell, extending a tech selloff that began the day before when Alphabet stirred renewed concerns about AI spending.
US futures point to a sharp decline at the open, with Nasdaq futures off 1.8% at present. That paints a grim picture for European markets when they open.
The tech selloff is not the only noteworthy move in broader markets. Treasury yields keep sliding despite lingering inflation worries, and that drop is doing little to cushion tech equities. Why might that be?
The answer may be found in a darker story lurking beneath the AI boom.
Despite the buzz around artificial intelligence, investors are beginning to wonder how much capital firms must spend before they see solid results. This week's earnings from Alphabet and Amazon have done little to ease those doubts.
With growing attention on AI-related credit risks, the drop in Treasury yields could signal a flight to safety rather than a welcome reduction in borrowing costs.
Gold's failure to benefit from the risk-off sentiment complicates the picture further. Month-end rebalancing or liquidity constraints may be at work, with equities taking a hard hit while bonds attract safety bids rather than inflation hedging. Inflation concerns remain relevant, as oil prices have held at elevated levels through the week.
So what does this mean for European markets before the open?
The overall risk environment is weak and could deteriorate further. Key signals to monitor are whether tech losses broaden into the wider equity market and whether yields keep dropping in tandem with stocks—a combination that would be especially troubling.
Currently, the genuine market concern may not be that the AI rally is losing momentum, but rather that investors are beginning to challenge the cost of sustaining it.
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Fidelity's Timmer says higher yields are a risk for stocks unless earnings keep pace. He sees no bubble if margins and spreads hold.
Amazon shares fell 7.3% in after-hours trading to $225.99, below the lowest analyst target of $230, after missing Q3 revenue and earnings estimates.
Amazon's AWS backlog grew to $578 billion at triple-digit rates, while AWS sales rose 39.3% to $46 billion and shares fell over 7% after the earnings miss.
South Korea's KOSPI fell 4.77% on Friday, led by chip stocks after Alphabet's capital spending surge, with Samsung and SK Hynix dropping sharply.