Martin Gamble on US markets: AI stocks slump as Meta reverses

Worries about the sustainability of AI spending saw the technology-heavy Nasdaq Composite endure a very difficult week.

Bucking the trend was the smaller companies Russell 2000, which benefited from some bargain hunting after a 10% drop from its August peak.

Brent oil prices approached their highest levels since April after rising around 16% over the last month.

September housing starts fell short of expectations while pending home sales dropped to a record low amid elevated mortgage rates.

Hasbro was one of the biggest gainers after the toymaker raised full year guidance on strong demand for its digital games while stronger sales of collectibles linked to Marvel, K-Pop Demon Hunters and Transformers boosted demand for traditional toys.

Lam Research fell by more than 10% after the chip-equipment maker highlighted component shortages constrained its growth outlook.

Meta slips on spending concerns

The Facebook owner delivered better than expected results with third-quarter revenue up 26% driven by an increase in daily active users to 3.64 billion.

Ad impressions were up 10%, and the average price Meta received increased 14%, showing AI is having a positive effect on ad targeting, helping Meta to extract more value.

These metrics show engagement continues to grow despite privacy concerns as Meta booked a $9.9 billion legal charge in the quarter in relation to a US settlement.

CEO Mark Zuckerberg said the launch of Meta’s AI agent Muse has attracted 10 million downloads since launching six weeks ago. “Roughly 25% of people who have set up Muse are using it on any given day,” enthused Zuckerberg.

Investors appear concerned over whether AI agents can create meaningful revenues rather than just add to costs. Analysts at Deutsche Bank estimate that a user on Meta's free Muse tier who reaches the monthly token limit could cost the company more than $40 per month in inference costs.

Meanwhile, Meta continues to spend heavily on servers and data centres and raised the lower end of its 2026 capital expenditures forecast by five billion to $135 billion, leaving the upper end unchanged at $145 billion.

Despite generating quarterly operating cash flow of $32.79 billion, free cash flow was negative by $2.12 billion for the first time since 2012, reflecting higher investments.

After a strong run ahead of its earnings Meta shares fell around 7%, which means they are back in the red year-to-date, compared with a 13% gain in the Nasdaq Composite.

SpaceX / Tesla deliver strong earnings

SpaceX’s third quarter revenues came in comfortably ahead of expectations after growing 161% year-on-year, while earnings per share of $0.35 were significantly ahead of analysts’ $0.13 forecast.

The AI division became the largest part of the group after revenues jumped nine-fold to $7.56 billion, mostly from renting out data centre capacity to firms like Anthropic and Alphabet.

The connectivity business Starlink grew revenues by 69% to $5.29 billion and remains the profit engine for the group, generating $3.37 billion of operating profits.

The company reported capital expenditures of $19.6 billion in line with expectations and raised fourth quarter guidance to between $35 billion and $40 billion.

Management reiterated its 2026 revenue goal of $100 billion with Musk saying he expected annual recurring revenue of between $500 billion and $1 trillion by the end of 2027, driven by explosive demand for data centres.

Musk also confirmed the board is considering combining SpaceX and Tesla with Barclays’ analysts suggesting a deal could be announced before Tesla’s annual meeting in December.

Tesla reported earnings which were comfortably ahead of analysts’ forecasts, with stronger than expected cash flows. The company lowered 2026 capital expenditure guidance to $20 billion from $25 billion.

Netflix trims advertising target

Despite quarterly earnings coming in ahead of analysts’ expectations, Netflix shares fell on continued worries over slowing growth and slow take-up of advertising.

While sales growth was double-digit, it was the slowest in three years. The biggest disappointment was Netflix trimming its 2026 advertising sales target by 10% to $2.7 billion.

Previously slated as one of the company’s next major growth areas, the slower than expected scaling up in advertising means investors are questioning whether it is temporary and fixable or if Netflix is struggling to attract advertisers.

Adding insult to injury, Netflix’s projection for fourth-quarter revenue and earnings per share were shy of analysts’ forecasts.

After recently cutting around 6% of its workforce and replacing senior executives Netflix clearly believes there is room for operational improvements.

Co-CEO Ted Sarandos said the company intends to focus on producing quality content to make Netflix a ‘must have’ service, and the recent executive shakeup was a step towards achieving that goal. Netflix shares have lost around half their value over the past year.