The AI Boom Has a Debt Problem 💸

Welcome back to the Day Trading newsletter 📈

Last week, hotter-than-expected inflation turned a tech wobble into the S&P 500's and Nasdaq's worst week since June, and put a spotlight on how much of the AI boom is running on borrowed money.

Let’s get into it 👇️ 

📆 Tuesday 10/20 — Netflix Q3 Earnings (after close ET): First report since the company's roughly 6% layoffs and its new chief content officer announcement. Watch subscriber and ad-revenue commentary and any change to margin guidance.

📆 Tuesday 10/20 — Housing Starts (8:30 a.m. ET) and Pending Home Sales (10:00 a.m. ET): September data on a housing market squeezed by a 10-year Treasury yield around 5.1%. Weak readings would show high borrowing costs biting.

📆 Wednesday 10/21 — Meta Q3 Earnings (after close ET; call at 4:30 p.m. ET): A key Big Tech test of whether AI spending is paying off, with debt-funded buildouts under scrutiny. Watch capital-spending guidance. Lam Research and Texas Instruments also report Wednesday.

📆 Wednesday 10/21 — Tesla Q3 Earnings (after close ET; call at 5:30 p.m. ET): Investors will want updates after the new Roadster reveal. Watch margins and any change to timelines.

📆 Friday 10/23 — S&P Global Flash PMIs (9:45 a.m. ET) and University of Michigan Consumer Sentiment (10:00 a.m. ET): Early October read on business activity and household inflation expectations. Elevated price expectations would keep Fed hike bets alive ahead of Oct. 28.

🔻 The S&P 500 and Nasdaq both had their worst week since June, while the Dow quietly gained. The S&P fell 1.9% for the week and closed Friday at 7,659.44, the Nasdaq dropped 4.5%, and small caps in the Russell 2000 lost 3%. The Dow rose 0.7%, its second straight weekly gain, as investors rotated away from growth stocks.

🛢️ Brent crude settled at $109.86 a barrel Friday, its highest close since May. The 3.7% jump came as supply fears persisted: a missile aimed at Saudi Arabia's Red Sea port of Yanbu was intercepted, and flows through the Strait of Hormuz remain well below normal. U.S. crude rose to around $101. Higher oil feeds directly into gas, shipping and airline costs, and it complicates the Fed's inflation fight.

🔼 U.S. wholesale prices jumped 1.3% in September, pushing the year-over-year rise to 6.3%, the highest since January 2023. The producer price index tracks what businesses pay before goods reach shoppers, so hot readings can flow into consumer prices later. It landed a day after the hot CPI report and added to rate-hike worries.

🛒 Retail sales rose 0.8% in September, beating forecasts, but gas did much of the work. Sales at gas stations jumped 6.4% as fuel prices climbed, while clothing and sporting goods declined. August was also revised up to a 1.3% gain. The report shows shoppers still spending, though partly because everything costs more.

🚘️ Tesla unveiled a redesigned Roadster Thursday night, and the stock jumped in premarket trading Friday. The car used pressurized air to make a controlled jump and land on all four wheels at SpaceX's Texas test facility. Elon Musk said production would begin in 2028, so the stock move is about the vision, not near-term sales.

📊 MSCI adopted new index rules that could remove bitcoin-holding companies like Strategy from its benchmarks. Instead of a blunt cap on firms whose crypto holdings were at least 50% of assets, MSCI will screen on operating assets and five financial ratios, starting with the November review. Index removal forces funds that track MSCI to sell. Strategy fell about 3% premarket Friday.

🎬️ Netflix named former Disney TV chairman Peter Rice its chief content officer, and the stock slipped. Rice joins Oct. 26, replacing Bela Bajaria. The move comes a day after Netflix announced its largest layoffs in four years and ahead of third-quarter earnings on Tuesday, which investors will scan for signs the streamer's growth is holding up.

CoreWeave, the Nvidia-backed AI data-center company carrying roughly $50 billion in debt, saw its stock and bonds tumble last week as hot inflation data raised bets on Fed rate hikes. 

The stock fell more than 11% Friday and roughly 25% for the week, which Reuters said could be its worst in over 11 months. The yield on its October 2031 bond briefly topped 16% Thursday, and the cost of insuring its debt against default rose above 1,000 basis points, a record, according to S&P Global Market Intelligence. AI-infrastructure peers followed: Nebius fell 10%, while Applied Digital and IREN each slipped 9%.

The Nasdaq ended the week down 4.5%, snapping a four-week winning streak.

The AI buildout is enormously expensive, and many of the companies constructing data centers pay for it by borrowing. That works when money is cheap. But September's inflation report showed consumer prices up 3.7% from a year earlier, above the 3.6% economists expected, and the Fed has already raised rates once, in September, to a range of 3.75% to 4%.

Markets now see roughly a three-in-ten chance of another hike at the Oct. 27-28 meeting, with December the base case. Higher rates make existing debt harder to refinance and new debt pricier.

A bond yield above 15% is the market demanding a steep premium to lend, a sign investors are starting to price in credit risk, not just growth. It is a signal of worry rather than a default, and Evercore, for one, kept its outperform rating on CoreWeave, arguing the market is misreading the business.

What to watch:

• Whether borrowing costs for AI builders stabilize or keep climbing. The Fed's decision on Oct. 28 is the big one, but earnings come first: Meta, which has been spending heavily on AI, reports Wednesday after the close, along with chip-equipment maker Lam Research and Texas Instruments, both read-throughs on chip demand.

• Also keep an eye on the 10-year Treasury yield, which ended Friday around 5.1%, since it sets the tone for borrowing costs across the market.

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⚠️ Disclaimer: Not financial advice. Do your research before making any trades.