By Daniela Hathorn, senior market analyst at Capital.com
Global markets are ending an exceptionally busy week on a cautious note, with technology stocks once again driving the deterioration in risk appetite. Wall Street closed lower on Thursday as concerns about the profitability of AI investment overshadowed otherwise resilient US economic data, while European stocks proved more resilient following the ECB’s decision to leave rates unchanged.
AI spending under scrutiny:
The standout development is the increasingly unforgiving reaction to Big Tech earnings. Alphabet’s sharp selloff highlighted growing concerns about AI-related cash burn, while Microsoft’s relatively stronger results offered a more constructive picture of monetisation. Amazon and Intel have now added to the uncertainty, with both shares falling sharply in after-hours trading following disappointing results and guidance.
The message from investors is becoming clearer: strong AI demand is no longer enough on its own. Companies need to demonstrate that substantial capital expenditure is translating into sustainable revenue growth, margins and free cash flow. This could remain a significant headwind for the Nasdaq, particularly given the concentration of market gains in a handful of technology companies.
Selloff spills into Asia and Europe:
The selloff has spilled into Asian markets this morning, with Japan’s Nikkei slipping and South Korea’s Kospi dropping sharply as semiconductor stocks come under pressure. European equities are also facing a weaker opening, with futures indicating early losses. This is particularly notable given Europe’s outperformance yesterday, suggesting that its lower exposure to technology may offer some protection, but not complete immunity from a broader deterioration in sentiment.
Central banks send mixed signals
Central banks and economic data have provided a more mixed picture. The Fed’s decision to leave rates unchanged offered little new guidance, while yesterday’s stronger-than-expected US GDP growth of 3.4% suggested that the economy remains resilient despite elevated borrowing costs. However, core PCE inflation at 3.1% reinforces expectations of further tightening, complicating the outlook for risk assets.
The ECB also held rates at 2.5%, helping European equities rally, while Christine Lagarde’s announcement that she will step down in February adds another element of uncertainty. This morning, the Bank of Japan maintained rates at 1.25% but signalled that inflation risks could warrant further increases.
Geopolitics keeps oil elevated:
Geopolitics remains another important driver. Brent crude is trading around $115 as uncertainty surrounding Middle East supply disruptions persists, despite tentative diplomatic efforts. Higher energy prices remain a potential inflationary risk, even as investors increasingly seek safety in government bonds.
Capital Com is an execution-only service provider. The material provided in this article is for information purposes only and should not be understood as investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page, then you do so entirely at your own risk.
