AI Spending Is Easy,
Making Money Is Harder

U.S. Futures & World Markets

Weakness in tech stocks is hitting the tape pretty hard this morning following disappointing earnings from Amazon (down 6%) and weak guidance from Intel (down 20%). This comes on the heels of weak results from Microsoft, Google, Fortinet, and ServiceNow. Not exactly a banner week for the tech trade. Breakfast Club clip: https://mcore.hopp.to/youtube394

The bills for much higher AI capex spending are coming due, and investors aren't happy with what they're seeing. Spending is larger than expected, and free cash flow is disappearing. The market wants to see a return on all this investment, and the current results aren't encouraging.

Consider the latest numbers: Google posted negative free cash flow of $9.1 billion. Meta posted negative FCF for the first time since 2012. Amazon's FCF went from +$14.8 billion year-over-year to negative $42.4 billion. SpaceX burned $10 billion in the quarter (stats from Roberts & Ryan). With all of the negative headlines, it's no surprise we're seeing a pullback in the AI trade, which has led the tape for much of the year.

Is this a pause in the AI trade or the beginning of a larger reassessment of what investors are willing to pay for the AI buildout? Until we see the spending translate into EARNINGS and cash flow, expect more volatility.

CORE Headlines

• Ukraine strikes a Russian oil refinery, which ends a pause. — WSJ
• 227 House seats lean toward Democrats in the upcoming midterm election, while 197 lean toward Republicans, with 11 toss-ups (218 needed for a majority). In the Senate, 49 seats lean Democratic and 46 lean Republican, with 5 toss-ups. — NBC
• There is no clear winner from Israel's election with 100% of votes counted. Both blocs fell short of the 61 seats needed to form a majority government. — CNN
• China has a large amount of overcapacity in autos. — Barron's (Expect a shakeout. It typically doesn't end well when fundamental economics aren't a consideration in how a business is run.)
• Binance suspended transactions after hackers stole $6.3B. — WSJ
• Nvidia is in talks to provide credit guarantees for an Nscale data center. — Bloomberg
• Foxconn expects to meet high demand for Apple's iPhone Duo. — Bloomberg
• Spotify wants to introduce an AI music service in 2027. — FT
• Google's stock suffered its worst day on record as investors confronted the painful tradeoffs a long-time dynamo faces from the AI transition. — WSJ
• ADT agreed to be acquired for $7.6B in cash by Thrive Holdings. — WSJ
• Intel shares plunged 22% after hours after disappointing third-quarter results and a forecast of a prolonged slowdown in PC sales. — WSJ

Charts & Data

Spending on data centers and computers is now America's single largest investment by far: 50% larger than single-family home construction, 3x factories, or 6x apartments. @josephpolitano via Daily Chartbook (Q3 GDP).

Both initial and continuing jobless claims remain remarkably low. Daily Chartbook.

The gap between weak income growth and resilient consumption has been bridged by wealth. This is not a borrowing story and it need not end badly — but consumption is now underwritten by asset valuations rather than by earned income. Andrew Cates, Haver Analytics via Daily Chartbook.

AI-driven inflation in core PCE is slowing, finally. @annaeconomist via Bloomberg via Daily Chartbook.

The median U.S. home-sale price has fallen for the first time in more than three years. Dana Anderson, Redfin via Daily Chartbook.

Financial firms, companies, and governments have raised a combined $6.61 trillion through investment-grade and junk-bond sales so far this year, up 15% from a year earlier and eclipsing 2025's record with two months still to go. Bloomberg via Daily Chartbook.

The AAII bull-bear spread's 52-week moving average has been negative for 72 consecutive weeks, the third-longest streak on record. The S&P 500 is +29% over this period. AAII via Daily Chartbook.

Active managers appear increasingly indecisive, with NAAIM exposure fluctuating around a weakening 8-week moving average. NAAIM via Daily Chartbook.

Animal spirits are not yet running hot. Goldman's US Equity Market Speculative Trading Indicator is firm, but remains below previous cycle peaks. Goldman via Daily Chartbook.

Retail investors have been aggressively buying the dip. October inflows into leveraged equity ETFs reached their highest monthly level on record, helping stabilize AI-related stocks. JPMorgan via Zero Hedge.

Early signs of renewed institutional appetite for AI after weeks of de-risking — the shift has yet to register in one-month positioning indicators, suggesting rotation within AI rather than a broad return of conviction. Vanda Research via Daily Chartbook.

The risk of systematic equity selling is receding as S&P 500 futures move further above key CTA thresholds. Vanda Research via The Daily Shot.

Long/short hedge funds have pushed their rolling Mag 7 beta toward the 97th percentile, while mutual fund beta remains near the 11th percentile. Charlie McElligott, Nomura via Zero Hedge.

This is not your ordinary momentum unwind: fundamental long/short momentum exposure collapsed from nearly 70% at the peak to around 15%. From crowded to deserted in a matter of months. Goldman Prime via Zero Hedge.

Short interest in the QQQ Nasdaq ETF has surged — likely long/short hedge funds shorting index risk to mitigate their net positions, not shorting outright. Simon White, Bloomberg via Daily Chartbook.

Interesting Reads

• A whopping 79 NBA players are listed on today's 2:30 PM injury report — roughly 15% of the entire league — X
• Top 100 Golf Resorts in the World: stay, play and indulge — Golf.com

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