Special Market Update: From ambition to arithmetic
The sell-off in technology has broadened following results from Alphabet, Amazon and Intel. Strong demand for cloud computing and AI infrastructure is being weighed against heavy investment, softer growth in some established businesses and pressure on cash generation. Investors are asking more demanding questions about how this investment will translate into shareholder returns. We remain positive on equities over the long term, but the latest moves reinforce the importance of selectivity, diversification and the discipline to remain invested through volatility.
What has happened? Technology selling broadens after further earnings disappointments
Equity markets gave back part of this week’s recovery on Thursday. The Nasdaq Composite closed 1.4% lower and the S&P 500 fell 0.3%. Alphabet lost 12.6%, removing roughly $500bn of market value - according to the Wall Street Journal, the second-largest single-day market-cap loss for any US company in history. However, more than 400 S&P 500 constituents advanced, showing how heavily the largest technology companies influenced the headline indices.
"Alphabet lost 12.6%, removing roughly $500bn of market value - according to the Wall Street Journal, the second-largest single-day market-cap loss for any US company in history."
Alphabet’s revenue grew 25% and cloud sales more than doubled, but search advertising fell short of expectations. Free cash flow was negative by $9.1bn, including a $5.2bn regulatory payment. Microsoft generated $18.6bn of positive free cash flow, although delayed data centre construction flattered that figure. Its shares nevertheless finished marginally lower.
Results from Amazon and Intel after the close added to the pressure. Amazon’s cloud revenue grew 39%, but slower retail and advertising growth and a disappointing holiday sales outlook kept attention on its spending commitments. Changes to Prime Day’s timing explained part of the slowdown. Intel’s weaker outlook highlighted prolonged softness in PC demand, despite strong growth in its data centre business.
By Friday morning, Amazon was down around 7% and Intel more than 25% in pre-market trading. Selling had spread across global technology: Japan’s Nikkei closed 2.1% lower and South Korea’s Kospi fell 3.5%. Nasdaq 100 futures were down 2.3% and S&P 500 futures 1.1%, pointing to further declines at the US open.
Government bonds rallied, with the ten-year US Treasury yield around 4.93% on Friday morning. The Federal Reserve had left rates unchanged on Wednesday, but inflation concerns persist. Brent crude rose back above $110 a barrel as renewed Middle East tensions added to pressure on energy prices.
Why has it happened? The scale of AI investment versus its returns
The AI boom is entering a more demanding phase. For two years, markets treated the scale of investment as evidence of conviction. They are now asking what that investment will return, how it will be financed and who will ultimately keep the value it creates.
Scale is changing the character of the businesses themselves. Some companies once prized for generating surplus cash and returning it through buybacks are now investing more than they generate in operating cash flow. Amazon reported negative free cash flow of $42.4bn over the twelve months to September, while maintaining plans for around $220bn of capital expenditure this year. Microsoft remains cash generative but also priced a $25bn bond issue on Thursday. Investors are reassessing how greater capital intensity, financing needs and execution risk should be reflected in valuations.
Amazon adds a related concern: heavy investment is continuing while growth in parts of the established business has slowed. Calendar effects explain some of the weakness, but the broader investment question remains whether cash generation can keep pace with spending commitments. Strong cloud demand and rising operating profits can coexist with substantial cash outflows.
Returns will also differ across the AI economy. Suppliers are earning exceptional profits today, but new capacity tends to relieve shortages and compress margins, a familiar pattern in semiconductors. Companies adopting AI may capture much of its benefit without financing its costliest infrastructure. Investors are rightly becoming more discriminating about business economics, even as selling spreads across the technology sector.
What should this mean for portfolios? Positioning with discipline for periods of volatility
We remain positive on the long-term outlook for equities - supported by earnings growth and ongoing innovation. We continue to favour businesses with strong balance sheets, durable cash generation and disciplined capital allocation, mindful that a sound business bought at too high a price can still be a disappointing investment. Retreats in the market can actually create welcome opportunities where long-term prospects remain intact. That said, we encourage clients to consider how well diversified they are:
Diversification should be assessed across the whole portfolio, including private investments and operating businesses. As we pointed out in our last market outlook, a technology fund, a data centre investment and a loan to a power developer may all depend on the same spending cycle. Different managers and asset-class labels can conceal a common exposure, so we favour a broader mix of regions, sectors and sources of return. The simultaneous pressure on US platforms, Asian chipmakers and European equipment suppliers also shows why geographic diversification needs to be accompanied by diversification of underlying economic exposure.
High-quality bonds now offer meaningful income and have provided a buffer during the latest technology sell-off. That protection is most dependable when the shock is to growth. The renewed rise in oil prices is a reminder that inflationary shocks can weigh on shares and bonds together.
Infrastructure remains an area of conviction, with careful attention to financing, contractual revenues and shared customers.
Selected macro and market-neutral hedge fund strategies can add returns less dependent on rising markets.
Structured products continue to allow us to express nuanced market views that optimise the relationship between risk and return.
Overall, this means reviewing concentrations and rebalancing where exposures have drifted beyond agreed allocations. Sufficient liquidity for spending and investment commitments preserves the ability to remain invested through volatility, while surplus cash can be deployed progressively where valuations are attractive.
A long investment horizon is a genuine advantage, but only when the portfolio is built to withstand the periods that test it. Our task is to preserve that advantage while remaining selective about where clients' capital is committed. We will continue to monitor market events closely and will update you as appropriate.
About the author
Nick Perryman is Vice Chairman and Partner at Clarus Global Capital and has over 25 years of investment and wealth management experience. He was previously a managing director at UBS where he was head of its international wealth business in London, and before that head of investment products and services which included $18bn under discretionary investment management. He is co-author of the book, Leadership in Wealth: Mastering the opportunities of wealth in your family, firm and society. Email Nick
Important notice
This article is provided for general information, discussion and educational purposes only. It reflects the views of the firm at the date of publication and is not intended to constitute, and should not be relied upon as, investment, financial, legal, tax, accounting or other professional advice. It does not constitute an offer, solicitation, recommendation or invitation to buy, sell or hold any investment, financial instrument or service, nor should it be regarded as a personal recommendation or as taking account of the objectives, financial circumstances or needs of any particular person.
