Wentz Weekly: Trade Uncertainties Return

Wentz Weekly Insights
Trade Uncertainties Return, Sending Stocks Lower

Stocks were on track for another positive week until Friday’s selloff – the 2.71% decline on Friday alone sent the S&P 500 down 2.43% for the week with the Russell 2000 small cap index underperforming with a 3.29% decline. It was the worst week for the major indices since May. The week was dominated by more artificial intelligence headlines with several large deals that continued the optimism in the AI theme. However, that was reversed mid-week after a report regarding Oracle then the selling accelerated Friday over a sudden escalation of trade tensions between the US and China.

Defensive sectors like utilities and consumer staples performed well, both positive for the week, while cyclical sectors like energy and consumer discretionary underperformed with over a 3% decline each. Meanwhile the Treasury market was positive as a pullback in yields sent most bonds higher due to the increased uncertainty and volatility.

Technology, particularly stocks related to artificial intelligence, got yet another boost the first half of the week after another massive deal was made. This time it was between OpenAI, considered one of the leaders and one of the largest artificial intelligence companies, and AMD (Advanced Micro Devices), a leader in CPU and GPUs, who makes the advanced AI chips which many consider second to Nvidia.

OpenAI said it agreed to a multiyear deal where it will purchase $300 billion of AMD’s advanced MI450 AI chips equal to 6 gigawatts of power consumption and estimated to be worth tens of billions of dollars in effort to help power its next generation of AI infrastructure. For reference, it is estimated by OpenAI that each gigawatt of capacity costs about $50 billion to bring online, so the deal could be around $300 billion. OpenAI has recently made multi-billion dollar deals with Nvidia, Oracle, and Broadcom.

Some of the optimism was reversed on Tuesday due to concerns around profitability in AI. This came after a report from The Information said Oracle lost nearly $100 million from renting out Nvidia’s advanced AI chips (called Blackwell) in the latest quarter and its cloud computing segment posting low margins which came as a surprise to investors (assumed to be a higher margin activity).

Return on investment (ROI) will be a bigger talking point and potential concern as time goes on. While there is a massive amount of investments going into the infrastructure to build out what powers artificial intelligence, whether it will pay off in the end and create higher productivity and increase monetization opportunities for companies that makes the investments worth it in the long-run will take years to know for sure.

The selling was intense on Friday after a post from President Trump that said China is becoming “very hostile,” adding that they are taking steps to impose export controls on rare earth minerals. This has been a major topic in the trade negotiations between the US and China as rare earths are important components to many high tech things like vehicles, smartphones, semiconductors, and military equipment.

Trump also suggested the planned meeting between him and President Xi has no reason to take place anymore. He also said the US is preparing to impose a “massive increase of tariffs on Chinese products,” a move that escalated trade tensions and complicates the trade situation as well as adds to the uncertainty with the impacts on the economy and inflation.

It was likely several things that got us to this point – China has recently told its customs inspectors to watch for Nvidia chip imports, it just announced it will begin levying fees on US cargo ships docking at its ports, it has reportedly launched an investigation into Qualcomm, and likely most important for Trump was the issue with exports of rare earth minerals.

A selloff with the news is no surprise – the last time the market had a noticeable drawdown came during the “Liberation Day” tariff announcements in early April that triggered a nearly 20% selloff. It is also important to keep things in perspective. Stocks are up about 11% since the beginning of the year and up around 35% since the lows in April. With such strong gains, investors have been looking for reasons to take profits.

While Trump attempted to alleviate the worries over the weekend by saying the situation “will all be fine,” the uncertainty on how this will play out will likely keep things volatile.

The next catalyst up is the start to third quarter earnings season with big banks starting to report quarterly financial results Tuesday, a welcome break from the continued news cycle around the government shutdown, trade/tariffs, and inflation/rate cuts. Outside of earnings, the other big event on the calendar this week is a scheduled speech at the National Association for Business Economics from Fed Chairman Powell on Tuesday. 

Week in Review:

It was a down week for stocks, the second decline in the past three weeks and the worst weekly decline since May. The names that have led the rally this year were the weakest last week, with most of the selling occurring Friday (if it wasn’t for Friday’s decline, stocks would have been higher for the week). Volatility, measured by the volatility index or VIX, spiked, although from very low levels, by 30%. The four major US indices finished as follows: S&P 500 -2.43%, Nasdaq -2.53%, Dow -2.73%, and Russell 2000 -3.29%. Treasuries moved higher over the week as yields fell – the 2-year Treasury yield fell 6 basis points to 3.51% while the 10-year yield fell 8 basis points to 4.04%. The dollar index rose 1.29% while gold eclipsed $4,000 per ounce for the first time ever and gained 2.45% last week. Bitcoin increased 7.40%. Oil fell 3.25% driven by a peace deal in the Middle East between Israel and Hamas.

Recent Economic Data

• Trade Balance: Delayed

• Jobless Claims: Delayed

• Consumer Credit: The total amount of credit outstanding by consumers was $5.032 trillion in August, up 0.3% in the month and up 1.64% from a year earlier, however still slightly below the peak in November 2024. Nonrevolving credit, like mortgage and auto loans, fell 0.5% in the month and is down 2.5% over the past year. Meanwhile, revolving credit, like credit cards, was up 0.2% in the month and up 1.1% over the past year.

• Consumer Sentiment: The consumer sentiment index was 55.0 for October, down only slightly from September and the lowest since May. The current conditions index was better than expected at 61.0, up slightly from 60.4 in September. The expectations index however was weaker at 51.2, lower than expected and down from 51.7 from September for the lowest since May. The one-year inflation expectation was still elevated at 4.6%, down slightly from 4.7% from last month while the five-year inflation expectation remained at 3.7%. 

Company News

• Advanced Micro Devices: AMD said it signed a multiyear deal with OpenAI to supply its most advanced AI chips, equal to about 6 gigawatts of power consumption and worth tens of billions of dollars, to help power OpenAI’s next generation of AI infrastructure. OpenAI has previously estimated each gigawatt of capacity costs about $50 billion to bring online, so the deal could represent up to $300 billion. As part of the deal OpenAI has the option to buy a 10% stake in AMD.

• Fifth Third Bancorp: Cincinnati’s Fifth Third Bancorp said it has agreed to acquire Dallas’s Comerica in an all-stock transaction valuing Comerica at $10.9 billion, representing an approximately 20% premium to where shares traded prior to the announcement. Under the agreement, Comerica stockholders will receive 1.8663 shares of Fifth Third for each share of Comerica owned. Fifth Third shareholders will own 73% of the combined company while Comerica shareholders will own 27%.

• AppLovin: Shares of AppLovin fell about 15% late Monday after Bloomberg reported it is being investigated by the SEC over its data collection practices. The investigation focuses on allegations the company violated service agreements with partners by sending more targeted advertising to consumers.

• Oracle: The Information reported that Oracle’s internal documents show it may be facing financial challenges when it comes to renting out Nvidia chips, saying it lost nearly $100 million from renting its chips in the latest quarter. It said its cloud business (the segment where this falls under) has generated small gross profit margins of about 14% in the past year or so, lower than what many have forecasted, creating worries if its expansion in AI cloud computing will turn out profitable and sustain investors’ expectations. Timing could be a factor, but the report plays into the AI bubble narrative that is being talked about more.

• Nvidia: Nvidia CEO Huang said in a CNBC interview what is happening in today’s world is dramatically different than what happened in the late 1990’s-2000 dot.com bubble. He also said demand for computing is up substantially this year, particularly in the last six months.

• Disney: Disney said it is raising the prices for tickets to its parks, with the price for a ticket over Christmas break now costing more than $200, a 5% increase from last year. Prices will rise, effective October 8, during non-peak times by an average of $5.

• Tesla: Tesla announced a new, more affordable version of its best selling cars – the Model Y and Model 3 that will start at $39,990 and $36,990 in effort to boost sales amid tougher competition and the loss of the $7,500 EV tax credit. The new versions remove some of the premium features in the older versions but maintain the driving range of at least 300 mile

Other News:

• Government Shutdown/Budget Bill: President Trump said early last week that he is willing to have a discussion with Democrats about health care, something Democrats want in the funding bill that needs passed to re-open the government. The shutdown is likely to last through this week as well as the Senate is not in session. In addition House Speaker Johnson said the House will not come back until the Senate passes the continuing resolution that the House passed weeks ago.

• Privatizing the Student Loan Portfolio: The Trump administration is considering selling off part of the $1.6 trillion student loan portfolio, according to Politico. It is looking at ways it can sell off the high-performing part of its portfolio to the private market in effort to reduce the amount of student loan debt on the government’s balance sheet. However, the report said selling the loans will raise significant legal and logistical challenges.

• America First: The Senate passed a bipartisan bill that would require advanced AI chipmakers to prioritize American customers over international customers like those from China, a move that threatens the chipmakers international expansion. The law would require chipmakers to fulfill domestic orders before any exports. Separately, The US government is looking to expand the restrictions on sale of chipmaking equipment to China. This comes after a House of Representatives Select Committee on China investigation found Chinese technology firms bought $38 billion worth of advanced machinery in the past year. Inconsistency in rules from countries like the US, Netherlands, and Japan have helped non-US chipmaking equipment manufacturers sell to Chinese firms that US companies could not and are the sales that gave China’s semiconductor companies the production capacity and technological sophistication they now possess.

• China Tightens Import Controls on Semiconductors: The Financial Times reported China is increasing its enforcement of import controls on semiconductors, including Nvidia’s AI chips, specifically saying it was initially to ensure Chinese companies are not ordering Nvidia’s chips that it made specifically for the Chinese market, the H20 chips. That has since been expanded to all advanced chips in effort to target smuggling of high-end chips from the US.

• Chips Exports to UAE Approved: Bloomberg reported the US approved several billion dollars worth of Nvidia chip exports to the United Arab Emirates, an initial step in implementing its bilateral AI agreement it made in May. The approval came after the UAE made plans for a reciprocal amount of investment in America. This marks the first approval for Nvidia AI chip sales to a Gulf nation.

• Power Issue For AI: Dell CEO Michael Dell said in an interview that data center demand remains very strong, but clients appear to be constrained by their ability to access enough energy to power them. He said, “I’m sure at some point there’ll be too many of these things built, but we don’t see any signs of that,” and talked about how power access has become a big issue.

• FOMC Meeting Minutes: The FOMC meeting minutes from the Fed’s September meeting showed a wider range of opinions on monetary policy with different opinions on the current level of restrictiveness which led to different views on how many rate cuts there should be for this year and next. Officials generally agreed upside risks to inflation remain but have diminished as the impacts from tariffs have materialized slower than anticipated and downside risks to the labor market remain. Some agreed in more policy easing (rate cuts) while some said financial conditions, by several measures, suggested policy may not be all that restrictive.

• Israel & Hamas Peace Deal: Israel and Hamas have agreed to the first phase of a peace deal to end the war in Gaza. The agreement would include the release of all hostages taken by Hamas, Israel withdrawing its troops to an agreed upon line, and aid will be able to enter the region. The second phase of the deal calls for Hamas to cede control of Gaza and turn its governance over to international trusteeship overseen by the US and Arab allies, although it is unclear if this phase has been agreed to.

• BLS To Call Back Employees Amid Shutdown: The Bureau of Labor Statistics has been asked by the Office of Management and Budget to bring employees back to the office to collect data on inflation and the labor market with a goal of having the reports released by the end of the month, more specifically prior to the Fed’s next meeting on October 28-29. The labor report was originally scheduled for October 1 while the inflation report is scheduled for next Wednesday. The CPI number for this month is used to calculate the cost-of-living adjustment for social security benefits as well as many other government spending figures.