Bonds Are the New Safe Haven as Money Rotates Out of Tech
TSMC beat and still fell, a giant AI offering is coming, and the market wants to know what AI growth costs.
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Wednesday marked a notable market shift. Bonds bounced after the hot CPI news, and big-cap AI no longer enjoyed safe-haven status. The most aggressive selling was in semiconductors, data centers and other names that were supposedly cheap because of their huge growth prospects.
That shift is carrying over into Thursday morning. Futures are split, with the Dow up about 0.5% while S&P 500 futures are down 0.3% and the Nasdaq 100 is off 1.3%, as I write. This doesn’t look like panic. It looks like rotation, with money moving into blue chips and out of technology.
Money Moves to Bonds
The iShares 20+ Year Treasury Bond ETF (TLT) is gapping higher Thursday morning. Bonds appear to be the new safe haven, attracting money because of their high yields. For months, investors seeking safety bought mega-caps. Now, with yields near their highest levels in years, bonds offer solid returns with far less risk, making them a natural destination for money coming out of tech.
Falling yields ease pressure on secondary stocks that have been hit hardest by higher rates, and if bonds keep attracting money, the laggards get a chance to finally catch a bid.
TSMC Beats and Drops
Taiwan Semiconductor Manufacturing (TSM) illustrates the problem facing AI suppliers. It beat estimates on earnings and revenue, posted a record profit and guided to strong fourth-quarter growth. The stock is lower anyway.
The market is looking past the beat to two things it doesn’t like. Gross margin slipped as TSMC ramps up its most advanced chips and builds more plants overseas, and management guided margins a bit lower for the fourth quarter. It also said spending over the next three years will be significantly higher than in the past three.
When the biggest beneficiary of the AI boom beats estimates and the stock still goes down, it tells you the market has stopped paying for growth alone. Investors want to know what it costs.
The Competition for Capital
There is more AI news this morning. The Wall Street Journal reports that Anthropic’s revenue climbed 45% to $16.8 billion in the third quarter, up from $11.6 billion in the second quarter and just under $5 billion in the first. Investors expect Anthropic to reach more than $110 billion in annualized revenue by year-end. Keep in mind that, as we saw with last week’s OpenAI report, the AI labs don’t count revenue the same way, so comparisons between them are tricky.
According to the WSJ, Anthropic is preparing for a public offering as soon as next month that could raise as much as $100 billion at a valuation of around $2 trillion. The numbers are good, but the timing is problematic. The competition for capital is intensifying. Governments are borrowing heavily, SpaceX (SPCX) is reportedly looking to raise $40 billion for chips, and now an offering of this size would pull in a huge amount of money at the same time.
Every dollar that goes into a giant AI offering is a dollar that isn’t going somewhere else, and that is one more reason the market is starting to question how much all of this will cost.
The Bear Market Is Already Deep
On Wednesday, Nasdaq new highs minus new lows ended at -643. That is more than 20% worse than the -525 reading in March, when the indexes were much lower. It illustrates how much deeper the bear market already is and how well the indexes have been hiding it.
So many stocks have already been through a bear market that conditions favor rotating into laggards rather than a broad selloff, even as chips, data centers and other recent leaders come under pressure. The big question is whether investors will have the appetite to buy these broken names while the groups that led for so long are being sold so hard.
PPI Is Next
We have a cluster of economic reports Thursday morning, and the producer price index is the one that matters most. CME FedWatch puts the odds of a rate hike at the October 28 meeting at about 32%, down from 44% right after the CPI report.
If PPI stacks another hot number on top of CPI, those odds are likely to climb again. Yields are falling, but Brent crude is above $106, and that keeps the inflation worry in place.
Game Plan
The depth of the damage is why I keep writing about staying patient and waiting for better chart development. You can’t just rush in and buy stocks that are down a lot and appear fundamentally good. It is important to wait for signs of stabilization, because that is what allows for logical stop levels and better-controlled risk.
With a giant AI offering on the way, the leaders may face a flood of new shares as well as doubts, and that makes me even more interested in what holds up among the laggards. I’m encouraged that the mega-caps finally cracked, but until the laggards show some stability, I’m keeping my buying small and holding plenty of dry powder.
At the time of publication, Rev Shark was long SPCX.
