Big week ends with big doubts

The S&P 500 continued to push higher yesterday as the US 2-year yield wavered around the 3.50% mark following a Federal Reserve (Fed) rate cut earlier this week that was ultimately perceived as not that hawkish after all. The cut is especially boosting the non-tech pockets of the market. The S&P 500’s equal-weight index is catching up with the tech-heavy, market-cap-weighted version, suggesting further upside potential from a rotation out of growth and into value. Normally, the tech and growth-heavy sectors react more to changes in borrowing costs because more of their future revenue gets discounted to today. But sky-high valuations in tech mean they’ve become less reactive to the rate cut. Investors clearly have bigger concerns.

The Nasdaq 100 failed to eke out gains after the Fed cut, as a more-than-10% slump in Oracle shares dampened sentiment across tech and dragged broader AI names lower. Nvidia, for example, lost more than 1.5% on worries about the circularity of AI deals — and for being situated at the centre of the largest AI loop to date: the one surrounding OpenAI.

If it’s any comfort, OpenAI announced a $1bn deal with Disney yesterday. Under the agreement, Disney will invest $1bn in OpenAI, and OpenAI will allow Sora users to generate short videos using more than 200 Disney, Marvel, Pixar and Star Wars characters. You might remain sceptical, but this is an interesting revenue channel for OpenAI, as content creators may be willing to spend more on Sora — which has faded somewhat since launch — because these characters can boost engagement and monetisation on platforms like YouTube.

This announcement is encouraging for those wondering how companies will monetise AI without relying heavily on advertising. The OpenAI–Disney partnership offers an alternative to flooding chatbots with ads — something that would make them feel as annoying as Facebook’s feed. It doesn’t have the same scale as ad revenue (Facebook earned $51.24 bn last quarter, with roughly $50.1 bn coming from advertising), but it does illustrate how OpenAI turns its models into dollars. The company has commercial deals across a wide range of industries. There is Microsoft, where Copilot uses OpenAI’s intelligence. There is Eli Lilly — a major pharma company — working with OpenAI on AI-enabled R&D and drug discovery. There are commerce-related partnerships, such as Walmart’s integration that lets users buy products through ChatGPT’s conversational interface. OpenAI previously supported Shopify and Etsy with chat-commerce capabilities in exchange for fees. And it has an enterprise partnership with Databricks to embed OpenAI models into its platform. OpenAI needs a continuous flow of such deals to justify its lofty valuation and those of its partners, but the negative press often feels disproportionate for a company that fundamentally changed how we interact with machines only three years ago.

Now, none of this answers whether “this is a bubble”. The internet outlived the dot-com crisis even as countless companies disappeared. But it does show how far AI capabilities can extend across industries and clients — from Microsoft and Eli Lilly to Walmart and Disney — and how productivity gains, in blue-collar sectors, could support long-term demand.

Turning to individual earnings, Broadcom reported very strong results yesterday. Revenue jumped 28% to $18 bn, and earnings surpassed expectations thanks to surging AI-chip demand. The company disclosed $73 bn in AI-related orders already booked, issued an upbeat Q1 revenue outlook of $19 bn, and raised its dividend by 10%. Not bad. The problem is that expectations were simply too high, and after an initial uptick the stock fell more than 4% in after-hours trading as investors focused on margin pressures and profit dynamics in AI.

So we’re back to square one. Taken together, Oracle and Broadcom reminded the market that while AI demand remains strong, leveraged investments and uncertain monetisation paths are preventing investors from adding exposure at current valuations.

Investors instead seem to prefer gold, silver, and copper. Gold is back in a solid uptrend after the October correction, supported by lower US yields and a softer dollar. Silver and copper benefit from the same bullish factors— plus tight supply conditions. Oil bulls, by contrast, remain impossible to cheer up. Despite earlier geopolitical tensions, WTI continues to test the $58 level on the downside, pressured by ample supply from the US, OPEC, and non-OPEC producers, even as the US dollar index falls below its 100-day moving average.

This week ends on a dovish note for the Fed, a positive one for Treasuries, metals, and value stocks, and a negative one for the dollar, oil, and tech stocks. Next week’s US CPI release — the first one since the shutdown — will either confirm or challenge the post-Fed trend. The last headline figure pointed to 3% inflation, still above the Fed’s 2% target. A sufficiently soft CPI print would likely reinforce the recent price action into year-end and could deliver fresh all-time highs in some indices, especially the smaller and non-tech ones. A stronger reading could cool risk appetite and revive concerns that the Fed may not be able to cut rates next year if inflation remains sticky.